Gaining control of your money is both simpler and harder than what everybody else tells you.
It’s simpler in that you don’t need to read hundreds of books, listen to financial pundits for hours, or even pay much attention to the news in order to do it.
It’s harder in that even if you know everything, unless you implement it and change your habits, you will fail.
It’s much like getting healthy physically. The fundamentals are not hard – eat the right amount of nutritious food and stay active – but our mind is clouded with so much noise and information overload, and our actions are thwarted by competing priorities.
From my experiences and extensive reading, there are a few fundamental, enduring principles that you need to understand, take to heart, and do something with in order to gain control of you money.
- Have a fundamental understanding of how the financial system works
If you don’t know basic fundamentals of finance, then you will not be able to make the right choices with your money. You don’t need to be a PhD in Economics – just enough knowledge to not be naive, and help you make good financial decisions (make yourself fool proof!).
- Always have a picture of where you are trying to go – a vision and goals
The old Zig Ziglar quote sums it up better than I ever could: “If you aim at nothing, you will hit it every time.” If you don’t know where you want to head with your financial situation, you will never move in the right direction! You will make poor decisions, and end up further from your “ideal state” than you thought that you would.
- Spend less than you earn
This is not rocket science, but is something that can be very hard to get started if you have never done it before. In order to successfully spend less than you earn, you must know (1) how much you make, how often, and (2) where you are spending your money. It also involves planning ahead, since you need to have a roadmap for how much money you can spend other than how much is in your bank account.
- Always seek to maximize and diversify your earnings
Do what you can to make as much money as you can, from as many different sources as you can, while still doing work that you feel good about and love.
- Don’t borrow money, except on a house.
Monthly payments are not your friend. Debt encourages us to pre-suppose on future earnings to satisfy desires right now. There are very limited examples of when borrowing money can be ok (purchasing a home), but in general, seek to live debt free, and if you are in debt, get out as fast as humanly possible.
- Save for emergencies and big purchases (short-term savings)
Emergencies are unpredictable, and can seriously derail financial progress, especially if you are forced to use a credit card or other debt to pay for them. Having a certain sum of money (generally 3-6 months of expenses) set aside will provide peace and assurance that small emergency can be paid for with cash. You will sleep better at night.
Big purchases (like cars, furniture, and new homes) can be planned for in advance, and we should set aside money for each of them. Eventually once your money is working for you, these items should not be emergencies as you’ll have the money saved up in advance.
- Invest your money for the long-term (long-term savings)
You will eventually need to retire (or at least scale back your work), and your kids will go to college or other technical training. These things are many years away, but should be planned for way in advance, otherwise you will regret it later.
- Be generous and give back
Doing well with money is not just so you can buy a pool, fill it with gold coins, and swim in it Scrooge McDuck style. Giving back is a fundamental element of what it means to handle your money well.
- Focus on relationships more than net worth
Though net worth is a very important metric to track and understand as you’re building wealth, always remember that relationships are more important. Seek to prioritize people over money – whatever that means in any particular situation.
- Living well with money is a process that you need to get good at, and it won’t happen overnight
We live in a society of instant gratification, which includes money – just look at the proliferation of get-rich-quick schemes (though these are not new, they are just more ubiquitous due to the internet).
We need to approach money management as a mental life skill that needs to be honed over time – motivation waxes and wanes, and we need to learn how to deal with that and continue to push forward.
Just like trying to live a healthier lifestyle requires education, knowledge, and discipline over time, so winning with money takes the same. That means that setbacks and failures are temporary and won’t overcome us – they offer you chances to learn more about yourself, and get better at the skill.
How have you seen these principles alive in your life?