Finance Fundamental Principles for Success
Want to create a solid financial foundation? These principles will help
Many people ask me what I think the future might hold. “What’s the market going to do next year?” they’ll say, or, “What kind of hot stock tip do you have?”
But these are the wrong questions to ask.
Maintaining a solid financial future doesn’t come from following some crazy water cooler stock tip. It comes from following a set of fundamental principles that govern how you manage your money over the long term. It's also important to avoid financial disasters at all cost.
Here are a few things that you should know in order to create more financial success in your own life.
Spend Less Than You Earn
I know this sounds obvious, but it’s actually harder than most people think.
Spending less than you earn isn’t the result of shopping clearance sales. It’s the result of avoiding unnecessary shopping in the first place.
There’s a lot of advertising that’s designed to make us think that we are saving money by purchasing something at a discount. However, all we’re doing is spending money that we otherwise would not have spent.
Furthermore, spending less than you earn can come from concentrating on the key word at the end of that sentence: earn.
If you focus on earning more while keeping your current spending at the same level, you’ll increase the gap between your spending and your income. The more that gap grows, the better the position you will be in.
Maintain Some Type of a Budget
You don’t necessarily have to maintain a detailed line item budget that details the amount of money that you spend on cat foot and toilet paper.
You can keep a big-picture budget that focuses on broad categories instead. For example, you could maintain a budget that shows the amount you spend in all housing costs. This could include your rent or mortgage, utilities, furniture, home maintenance, and anything else that could be classified as housing-related.
You could have a second category that broadly relates to anything involving transportation. This could include your car payments, gasoline, car repairs, subway passes, and more.
Then you could have a category for savings, one for debt payoff, and one for everything else. Yes, that’s an extremely broad budget, but it at least allows you to see at a high level where your money is going.
The broadest and easiest budget is something that I refer to as the anti-budget. The concept behind it is incredibly easy.
You figure out how much money you want to save every month, pull that amount from the top, and then live on the rest. As long as you're meeting your savings target, it doesn’t matter how much money you’re spending on towels versus toothpaste.
All that matters is that you are ultimately meeting your target amount in savings. By the way, when I refer to savings, I’m talking about any activity that increases your net worth. Examples include aggressively repaying a debt, contributing to your retirement accounts, or accumulating literal savings in the bank.
Be Attentive to Fees
If you are going to be frugal in just one area of your life, make sure that you are frugal about your investment fees.
Many funds charge purchase costs or redemption costs, which means that you will pay money either going into or coming out of that fund.
In addition, many funds have ongoing expense ratios which are annual fees that come out of your investments. The fees feel invisible because you don’t have to write a check for them or see them on your statements. They’re quietly deducted from your returns, but that doesn’t make them any less real.
Be frugal about your investment choices. Both Vanguard and Charles Schwab offer low-fee index funds that track a broad market.
Pay Attention to Your Three Biggest Expense Categories
These are housing, transportation, and food. There’s a pretty good chance that you are not going to spend money on anything more than the total amount that you spend on these three categories.
If you can reduce your housing, transit, and food costs, you will make massive strides at improving your financial well-being.
Make Savings Automatic
Automatically pull money from every paycheck into retirement accounts, savings accounts, and additional debt payoff.
The more that you can automate these savings, rather than doing it manually, the more likely you are to stick to your plan.