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Financial improvement comes with action + education
There are countless strategies and new information to implement, but the basics withstand time.
If you master the basic financial principles, you will succeed in the game of money.
Remember, knowledge is nothing but potential power. Applied knowledge is actual power. If you don’t pair actions with knowledge (financial education), you will remain in the same financial predicament you’re in now.
The 10 Financial Basics:
1. Stay under your income.
This is the most basic concept. Yet many people skip it. Mainly because it’s easy to consider we live in a society that encourages people to spend more than they earn and consistently inflate their lifestyle.
If you ever want to experience a positive net worth, build wealth, and have financial freedom, you must spend less than you earn.
It’s the most important financial concept you could ever implement.
Avoid Living Paycheck to Paycheck
The next paycheck should increase your bottom line, but you should never be desperate. Be able to go without a paycheck for months or years even. That’s when you know you’re on your way to financial freedom.
2. Consistently increase your income.
At the same time, while you stay under your income, you should consistently increase your income so you are immune to inflation.
Don’t just accept the 1–3% average salary increase most employers offer. Aim for above this (6% and more) so you’re consistently outpacing inflation.
3. Diversify your income.
Do you still have one primary source of income? If so, get a secondary source of income immediately, and your partner’s income doesn’t count. There should be at least four income sources between the both of you.
The best way to get caught in a financial bind is not to have an emergency fund or a secondary income source if you ever lose your primary one.
4. Invest 10% of your income.
Some people are aggressive and invest 50–85% of their income. At a minimum, invest at least 10% of your income. That way, you’re always putting something away.
It’s better to put a little something away versus nothing at all. And sometimes, a person has to start small.
You might even have to start with 1%. But gradually increase the amount you invest. The more you invest (prudently), the more wealth you will have. Furthermore, the more you invest, the more money you have working for you around the clock.
5. Establish a 3–12 month emergency fund.
If you’re an entrepreneur or work for yourself, it is recommended that you have a 9–12 month emergency fund.
Let’s say you work for a traditional employer; in this case, a 3–6 month emergency fund might be adequate. However, I’ve found that three-month emergency funds tend to empty relatively quickly.
Determine what works for you, and pick the months that cause the least stress. The people who are least stressed about losing a job are the ones who aren’t living paycheck to paycheck.
Bare Bones Expenses
An emergency fund should equal the bare minimum expenses you pay monthly. Cut out all unnecessary and non-essential spending.
What’s left? You want to multiply that amount by x months to determine how much your emergency fund will have.
Low-Risk Investing
Consider keeping your emergency fund in a low-risk investment account, so it can make money instead of sitting still.
6. Avoid credit card debt.
Credit cards are alright. And sometimes temporary credit card debt isn’t bad, either. But if you’re consistently overspending and placing that overspending on a credit card, consistently maxing out your credit cards, and only paying the minimum payments, reconsider using a credit card.
Credit cards are tools. They can be used to help or hurt you. Unfortunately, credit cards hurt many people, but this doesn’t have to be true for you.
Only spend what you have in the bank.
Reminders:
Set up automatic payments.
Spend no more than 10–30% of your credit card limit.
Always pay off the monthly statement balance to avoid paying interest.
If you don’t have the cash in the bank, don’t use the credit card on a non-essential purchase.
7. Don’t buy more car than you should.
85% of Americans have a car note. What does this mean? Most people can’t afford the cards they drive. Furthermore, people usually drive cars that are more than 10–30% of their gross annual income.
The average car is around 50 grand; this is the average salary. As tempting as it is to buy a fancy car, you must remember it’s only a piece of metal. Moreover, it’s a depreciating liability. It’s an asset once you pay it off, but it’s usually severely depreciated by that point.
Cars don’t hold a ton of value. Think twice before you invest your money into a set of new wheels. The new car smell wears off quickly. But the car notes don’t.
8. Don’t buy more house than you should.
The same applies here. Society sets us up to be able to afford more than we actually can.
Buy what you need and only what you can afford. When buying a house, you must consider taxes, maintenance costs, HOA and community fees, etc. Aim to save at least 2% of the total house value each year to cover these costs.
What if I’m a renter?
Aim to spend no more than 10–30% of your income on housing. I recommend sticking around that 10% mark; if you do, you will rarely be stressed about housing costs.
9. Avoid student loans.
Education is essential, but it should never cost you peace. Students and adults around the world are swamped with student debt. Many don’t have jobs that provide income to cover student loan costs.
If you can go to school for free, do so. Everyone can apply to programs and scholarships, so apply.
The best kind of education is free education.
I ended up getting student loans, but I also knew I would be able to pay them off relatively quickly; this is not everyone’s story.
10. Continuous Education
If you’re not learning and growing, you’re regressing. Study personal finance to elevate your income, money mindset, and financial habits.
We don’t learn about money in school. So, we must teach ourselves so we don’t perpetuate financial ignorance and poverty.
Economic disadvantages don’t have to be permanent.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.