Do you have a hard time managing your finances? Perhaps it is time for you to get back to basics. By following some simple yet important rules, you can improve your financial situation. We call these rules the MoneyTips 10 Commandments of Personal Finance.
I. Spend Less than you Earn — Sounds simple, doesn't it? Yet too many of us rack up excessive levels of debt because we overspend. On occasional weeks or months you may need to spend beyond your paycheck, but doing it on a regular basis is unsustainable.
II. Save until you set up an Emergency Fund of 6 Months of Expenses — A job loss could happen at any time, so be prepared. You don’t want to live off your credit cards and fall into a debt spiral [LINK] while searching for a new gig. A 6-month emergency fund is significant, but provides a solid cushion. Based on 2015 data from the Department of Labor, average household consumer expenditures are $55,978, so a 6-month supply would be in the $28,000 neighborhood. Of course, if your income dried up, you couldn’t follow Commandment I, but you would cut your spending drastically. Start salting away some percentage of your income by direct deposit in an emergency fund. You will be amazed at how fast it grows into thousands — if you avoid raiding it. It is much better to have it and not need it than need it and not have it.
III. Track your Spending — You probably won't be able to meet the first two Commandments without a budget — the key to tracking both spending and income. Take the time to set up a monthly budget and adjust your spending if you find yourself violating Commandment I.
IV. Understand your Credit Score and Then Raise It — Your credit score is the product of your credit report, which contains a record of your credit transactions, loans, and payments. It is the key to getting loan approvals and favorable interest rates. Missing payments and/or using too much of your available credit limit will harm your credit score. You can check your credit score and read your credit report for free within minutes using MoneyTips Credit Manager. Make sure that it is accurate, and then control your credit purchases and payments to raise your credit score.
V. Compare Prices Before You Buy — Why would you pay any more for an item than you have to? Given the hectic lives of most Americans, it is easy to save time and go with the first purchase. However, if you develop a shopper's mindset, you will learn how to efficiently compare prices and save money in the process.
VI. Start Investing and Retirement Planning Early — It is vital to put away at least some amount of your income toward retirement funds in order to let them grow for as long as possible. Make the most of compound interest on savings accounts and the long-term rate of growth in the stock market by engaging as early as possible. The free MoneyTips Retirement Planner can help you calculate when you can retire without jeopardizing your lifestyle.
VII. Plan for Large but Irregular Expenses — As you formulate your budget, include the occasional miscellaneous expense to cover irregular and unpredictable expenses like auto repair. This is separate from regular planned payments such as annual insurance payments and taxes, which should be incorporated in your budget. Nor is this part of your emergency fund. It’s not an emergency if you planned for it.
VIII. Take A Day to Think About Purchases — Delaying your purchases for a day gives you time to think about whether or not you really need the items and curbs regrettable impulse buys. Sale items may be an exception to this rule, but even in that case, it is wise to question how badly you need the item versus the money you would use to purchase it. When times are tough, and you’re cutting expenses, would you rather have a rarely worn $400 pair of shoes in your closet or $400 cash?
IX. Write a Will and Keep It Updated — Do not leave it up to the state to decide what happens to your estate when you pass away. Write down your wishes in a will and keep it current. Update it as your finances and circumstances change.
X. Learn from your Mistakes — We all make mistakes, but the important thing is that we understand what to do differently from now on. We can't control things that have already happened, but we can control what we do in the future.
Don’t get lost for years wandering in a financial wasteland. We believe following our 10 Commandments of Personal Finance can set you on the right financial path. Do you believe?