How do you feel when you hear the word “money?” Does thinking about finance make you feel positive or negative? Eager or worried? Motivated or overwhelmed?
Personal finance feels complicated because it’s never just about the numbers.
Personal finance is personal, and it’s also highly emotional. It’s easy to feel overwhelmed and confused by what you need to do with your money to be successful — but it doesn’t have to be so complicated.
To help you focus on the key concepts that you need to implement to reach financial success, I want to share four fundamental rules of personal finance.
You can use these four rules like a framework for navigating financial decision-making and choices. But first, it might help to understand what can get in the way of making smart choices.
And that takes us back to how money makes us feel.
Why Knowing the Rules Isn’t Enough
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.
Other Money Mindsets That Can Stop You from Following Smart Rules of Personal Finance
Other mindsets that can get in the way of rational decision-making around money include both abundance and scarcity mindsets as well as growth and fixed mindsets.
These usually apply more broadly to life, not just how we feel about money, and most of us will gravitate toward one or the other to use as the lens with which we interpret how the world works.
For example, with a scarcity mindset, you might believe that money is hard to come by and any dollar earned is a dollar at risk of being taken away at any moment.
You might constantly feel like anything good that happens to you is fleeting and unlikely to last; you might find yourself waiting for the other shoe to drop — all of which seriously impacts your ability to think clearly, logically, and calmly about financial decisions you need to make.
Or say you’re one of those people who says, “I’m not good at math,” or “I’m not great with numbers,” and therefore believes you can’t be good with money, either.
Sure, maybe your algebra class didn’t go so well in high school. But that has nothing to do with your ability or potential ability to successfully manage your money in such a way that you can reach your net worth goals and go from “just okay” to “very wealthy.”
Keep telling yourself that, though, and your story will become a self-fulfilling prophecy.
We all need to learn how to recognize, address, and manage the mental and emotional part of money management in order to achieve financial success and stability — especially if you’re seeking to build your own wealth from scratch.
The first step is what we’ve done here: simply recognizing the fact that these things exist, even though they aren’t obvious barriers (because they’re mental and emotional) to success in the way poverty, inequality, or bigotry might be obvious barriers to financial progress.
The biggest difference between the former (your mental state) and the latter (external conditions that happen outside or around you) is that you can control how you react and respond. You can change your thoughts, and if you can change your thoughts then you can change your habits and ultimate future outcomes for your life.
Knowledge alone is not enough — and just increasing your self-awareness isn’t enough, either. We need to use these two tools together.
As 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 the four fundamental laws of personal finance.
The Four 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 (and 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 four rules more often than not, you’ll probably find yourself in decent financial shape:
- Spend less than you make
- Spend way less than you make, and save the rest
- Earn more money
- Make your money earn more money
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.
Bummer, right? The solution to this unhappy outcome: live below your means. It’s that simple.
Know how much money comes into your accounts each month, and manage how much goes out so that you do not spend more than what you earn.
In most cases, this is the very first step to take toward building wealth.
Rules of Personal Finance, #2: Spend Way Less Than You Make (and Save the Rest)
Rule number two requires that you double down on this idea of living within your means. If you want to generate serious wealth and you’re starting from scratch, you need tools to leverage.
In this case, tools = your money. More specifically, 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 isn’t about living a miserly life.
This will provide you with freely-available cash to use each month to increase your net worth either by saving or investing.
Creating that gap might mean cutting back on some expenses to free up cash to save or invest. But again, the goal is not to see how little you can get away with living on, or to see how long you could go eating only Ramen noodles before you went insane.
Having money for the sake of having money isn’t extremely satisfying. Living well today and enjoying the life you want to have right now while still planning responsibly for tomorrow, however, is what we’re after.
Our favorite trick for doing this well? 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.
That’s why you may need to focus on earning 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, I don’t find that very useful. 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 stupid, 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 using your money in a way that aligns with your values and what you want for your life is not a bad thing.
The trouble is that your current income 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 didn’t grow wealth by sitting around clipping coupons and hoping that would be enough. They considered the other side of the equation, too, and made moves to increase their income.
Making more is a huge part of learning how to become wealthy. When you earn more, you have more resources available to deploy and your ability to grow wealth compounds.
Rules of Personal Finance, #4: Make Your Money Earn Money
Hey, it’s not just you that should get to work. All the extra money you start earning? Give it a job, too. Invest it.
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 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? 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.
The Rules Are Simple, But It’s Implementation That Gets Tough
Like I said at the beginning: 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 — and yes, even a little luck along the way.
Building your own wealth when there’s no inheritance or windfall coming your way is not always fun. You have to make hard choices.
And you need to be consistent, which might be the hardest thing of all to achieve.
Anyone can nail it once. Nailing it over and over again separates those who succeed from those who had the potential to create, build, and grow their own wealth, but ultimately failed.
What will you choose to do with this combination of knowledge and self-awareness of the mental blocks that might trip you up along the way? You have a lot of options for implementation, from DIY to working with a professional financial planner who can provide guidance and support.
The right answer for you wholly depends on your unique situation — but the one thing that applies to all of us is that your participation is required. You have to take action.
Choose one step to take right now, and get to work.