What comes up for you when you hear the word “money?”
I’d be willing to bet the first things that come to mind aren’t numbers and figures, stock symbols, spreadsheets, or Monte Carlo analyses. It’s almost certainly not an organized list of rules of personal finance to know and follow.
When you think “money,” you probably jump straight to feelings. Whether it’s positive or negative, eager or worried, motivated or overwhelmed, thinking about money usually puts us into a particular emotional state.
This is exactly what makes personal finance complicated.
Why You Need Rules of Personal Finance to Reach Success
It’s never just about the numbers or even objective facts. Personal finance is personal, and it’s also highly emotional.
Those emotions can cloud your judgment and decision-making process, whether the feelings are positive or negative.
Stress, overwhelm, and uncertainty can obviously make it harder to reach success… but overconfidence, too much excitement, or even a lack of concern and worry can also lead to errors, bad choices, and financial mismanagement.
To help you focus on the key concepts that you need to implement to reach financial success while cutting through the noise your feelings about money can generate, you need some guiding principals.
You need some fundamental rules of personal finance to steer you in the right direction.
Having a rules-based system helps you check your emotions so you can focus on facts and what’s objectively true, rather than getting tangled up in the kinds of thinking errors that your feelings can often make you vulernable to making.
You can use the following five rules of personal finance like a framework for navigating financial decision-making and choices. But first, it might help to understand more about what can get in the way of making smart choices in the first place.
How Our Mindset Can Lead Us Astray with Money Management
Humans can grasp basic financial concepts as early as age 3, and by age 7 most of our fundamental beliefs and habits around money are firmly set in our minds.
How people think and feel about money matters because emotions drive eventual actions and behavior — which is why you can know the “right” and “wrong” things to do with your money, and still make poor financial choices and decisions.
What you understand to be true about personal finance is often so deeply ingrained from your childhood and formative experiences that you might not even be consciously aware of why you have certain preferences or habits.
Brad Klontz, Psy.D., CFP®, founder of the Financial Psychology Institute® and an Associate Professor of Practice in Financial Psychology at Creighton University Heider College of Business, says that there are four main attitudes we hold in our heads around money.
Klontz calls these money scripts, and they include:
- Money avoidance
- Money worship
- Money status
- Money vigilance
The first three mindsets are strongly associated with negative behaviors around money. Klontz’s research shows people who cling to the first three scripts tend to have lower levels of net worth, lower income, and higher amounts of revolving credit.
Money vigilance tends to lead people to be more protective around their finances, but it’s not necessarily a good thing either. This vigilance can morph into anxiety or extreme frugality, which, as Klontz points out, “could keep someone from enjoying the benefits and sense of security that money can provide.”
It’s not all bad news, however. The key is to identify these patterns and see where they might lead to ineffective or destructive behaviors.
Klontz says that once we can spot the scripts, we can challenge — and change — them to stop the cycle of destructive financial behavior and start focusing on more productive, healthier habits around money.
And a you start working on your awareness of how you might naturally think or feel about money, you need to pair that with a smart application of some fundamental laws of personal finance.
Five Fundamental Rules of Personal Finance
These principles serve as a framework that you can use to guide your decision-making processes, and to help you understand the kinds of habits you want to build (as well as the behaviors you may want to avoid along the way).
Again, personal finance can feel complicated, but the first thing we want to do is strip complication away and show that this stuff is actually pretty simple.
If you could follow these five rules more often than not, you’ll probably find yourself enjoying increasing levels of financial success. Those rules of personal finance are to:
- Spend less than you make
- Spend way less than you make, and save the rest
- Earn more money
- Make your money earn more money
- Repeat consistently
Let’s break each one of these rules down to better understand what they mean.
Rules of Personal Finance, #1: Spend Less Than You Make
If your spending far outpaces your income, then you’ll end up in the red, in debt, struggling to dig yourself out of a very unpleasant financial hole.
The solution to this unhappy outcome: Live below your means.
It’s that simple, but of course, it’s often not easy to manage your cash flow this way given all the demands you likely need to meet.
But if we’re talking about fundamental rules for financial success, this is number one. Know how much money comes into your accounts each month, and don’t let your expenses exceed that amout.
Rules of Personal Finance, #2: Spend Way Less Than You Make (and Save the Rest)
Rule number two requires that you double down on the idea of living within your means. If you want to generate serious wealth and you’re starting from scratch, you need tools you can use to create leverage.
In this case, tools you can use = your money. The most powerful tool at your disposal is your cash flow. And like any tool, you need to know how to wield it if you want an excellent result.
When it comes to your cash flow, focus on making the gap between your income and your expenses as wide as you can (without going to extremes and depriving yourself).
This will provide you with freely-available cash to use each month to increase your net worth either by saving or investing, and ideally both.
Creating that gap might mean cutting back on some expenses to free up cash to save or invest. Or it might mean intentionally choosing your fixed costs with care.
A common, real-world example here is in homebuying. If you want to accelerate your progress to financial success, you don’t buy as much home as you can possibly afford.
Instead, you carefully evaluate what kind of fixed cost (for a mortgage) you can plug into your cash flow so that you can manage the expense over time while also still saving, investing, and enjoying some of your other cash for other things in the present.
This kind of affordability analysis and big-decision consulting is exactly what we do for our financial planning clients. We want to make sure they can achieve their goals in the short- and long-term, while still having money available to use on things they want to experience right now.
Living well today and enjoying the life you want to have right now while still planning responsibly for tomorrow is what we’re after.
Want a shortcut that explains how to do this? Here’s the hack: Align your spending with your values. Cut the expenses that don’t match up with what’s most important to you.
Rules of Personal Finance, #3: Earn More Money
This may sound good so far — unless you’re looking at your income, and then tallying up your expenses, and realizing there just isn’t that much left over to use for the purposes of boosting your nest egg.
Which is why any set of rules of personal finance for financial success are incomplete unless they include “earn more money.”
Telling people “just spend less!” seems to be the one and only solution the majority of the population of personal finance bloggers and money advice-givers has to offer.
Frankly, that’s not very useful (or good advice for living a full life where you can experience what matters most to you). Of course you need to keep your expenses in check; of course you need to build a budget, stick to it, and not blow your money on superficial purchases that bring you no value.
But money is a tool. It’s meant to be used. The end-all, be-all answer to all of life’s money problems is not spend less. You might need to spend better, but spending less is incomplete advice for getting to financial success.
The trouble is that your current earnings may not support the life you want now while also allowing you to build wealth to use throughout your entire lifetime.
If that’s the case, it’s time to earn more money so you have more options and income to leverage.
Self-made millionaires don’t grow wealth by sitting around clipping coupons and hoping that’s enough. They consider the other side of the equation, too, and looked to proactively increase the amount of money coming in the door.
Making more is a huge part of the process of growing wealth. When you earn more, you have more resources available to deploy and your ability to grow wealth compounds.
The trouble with this advice, and why so few people want to give it, is that there’s no easy prescriptive answer for how to do this. While you have some influence over what you earn, you can’t directly control it in the same way you can immediately make a change to what you spend.
Earning more money is difficult, requires time and commitment, and there are elements of luck and randomness at play. But there are also aspects where your choices and actions will have an impact, and that’s where you need to focus when it comes to increasing your income.
Here are a few examples of where you can move the needle with your ability to earn more money:
- Your own job performance and ability to negotiate current pay within your existing company
- Changing positions or employers, especially if you are in certain fields (like tech, where changing jobs every 3-4 years is a great strategy for increasing income over time)
- Seeking out jobs that include equity compensation or bonus structures which can provide a huge boost to your regular W2 pay
- Exploring self-employment or entrepreneurship opportunities
Rules of Personal Finance, #4: Make Your Money Earn Money
It’s not just you that needs to be doing all this work to get to financial success. Make sure your money has a job beyond sitting in the bank, too.
You need to invest a portion of your earnings for long-term growth.
Building a strong savings habit and adding to cash savings provides a good start — but just like “spending less” isn’t a complete solution, “saving more” isn’t one, either.
If you want to build wealth from scratch, you must invest. You can invest in yourself, in the financial markets, in a business (or businesses), in real estate, and more, but you need to invest in something you believe in.
You should also invest in something you understand. Don’t have a clue how to safely, strategically invest in real estate? It’s probably not the smartest move to think you’re going to get rich off flipping houses, then.
For most people, investing in a globally-diversified stock market portfolio is the simplest, easiest way to get started on the road to building wealth.
It’s not the only option and you can always add more complexity as you learn more, but this is a smart starting point for the majority of people. It’s also a good way to grow wealth without taking on unnecessary risks and opening yourself up to losses that are hard to recover from.
A complete investment strategy should consider the following elements:
- Assessing risk tolerance and capacity
- Choosing asset allocation
- Selecting investments
- Coordinating account transfers
- Trading accounts
- Rebalancing and investing cash
- Target dimensions of higher-expected returns
- Harvesting tax losses
- Accessing private markets
Rules of Personal Finance, #5: Repeat!
You can do almost anything once. The real challenge is in repeating the necessary actions consistently over a long enough period of time to achieve your goals and grow wealth.
Consistent repetition is what separates those who reach high levels of financial success from those who had the potential to create, build, and grow their own wealth but ultimately failed.
All of the fundamental rules of personal finance are pretty simple. The tricky part is that “simple” is not the same as “easy,” and following these rules consistently takes work, commitment, dedication, perseverance, knowledge, accountability, and skill.
Repeating all of these money management behaviors over and over again for years is extremely challenging. The people who do it well are those who have a system in place to make that repetiton easier and more manageable.
That’s a major piece of the puzzle that our wealth management clients have taken care of for them. They know the important of prioritizing their financial planning – and they also know it’s a complex undertaking where expert guidance and support can make a material difference to their balance sheets.
That’s why they don’t try to add one more thing on their plates to try to balance (but inevitably let slip through the cracks).
They offload the work of ongoing planning and money management to us, their financial advisors — so they have one less thing to worry about, second-guess, or stress over not getting done.
BYH clients enjoy:
- an actual system for spending and saving that allows you to enjoy more of what you want in life now, without jeopardizing your future financial security
- knowing the true costs and benefits of each decision you need to make when you reach critical inflection points in life — like when you’re looking at a career change, starting a business, beginning a family, buying a home, or working toward financial freedom
- the ability to for opportunities and mitigate risks along the way, all while keeping your goals and values in mind so your financial strategy reflects what matters most to you.
Our financial planning process and investment management strategies that provide a realistic path for achieving what’s most important to our clients. Curious about joining them on the journey? Request a complimentary consultation and one-page financial plan to get you started here.