10 key money rules to set a solid foundation for your future wealth and abundance. The money rules aren’t in any order of importance because they are all necessary!
Live below your means
To start living below your means as quickly as possible, start by evaluating your expenses. This task in itself can be a huge task for some people, so if it feels a little daunting, then know that you are not alone!
Review your last few months bank and credit card statements, looking for outgoings that you no longer need. These could be unused subscriptions, or perhaps you are paying for software, where a free version will suffice?
And if you get to the stage where you can’t cut your expenses any further, then the other area to look at is increasing income!
Make sure that you are saving
The aim is to save at least ten per cent of your income, but if you are new to saving, start with whatever you can afford.
Set up an automatic transfer into your savings account as soon as possible after the date you get paid your salary or make regular withdrawals from your business account.
Once set up, start using this simple strategy: Increase your savings by ten per cent every three months. At the end of each three months, you’ll then increase the amount of your monthly savings by ten per cent. And then the next at the end of the next three months, you increase it again by ten per cent.
Using this simple method means that you can ramp up your savings in a short amount of time.
Create and follow a budget
Creating a budget doesn’t have to be over complicated. Start by reviewing your spending to see where you can save some money, such as subscriptions you no longer need. When you have completed your review, you can then create your budget from there.
A simple way to budget is to allocate your planned spending (based on what you currently spend, less the amounts you have identified that you can save) into a set of core categories.
- household bills
- food and groceries
- paying down debt
- your savings
- And then what’s left is what you spend on your lifestyle expenses.
Creating the budget is just the first part of the process, as you also need to follow it and review it. So you check your actual spending at the end of the month and compare the spending per category to your budgeted amounts.
- Identify areas where you could cut down on your spending.
- Look at triggers for your spending.
- Maybe you consistently overspend in particular areas, so look at the reasons potentially as to why you are overspending.
The critical point is to remember not to make your budget too tight because if it is too tight, you will not likely follow it for very long.
Track your finances
I recommend that you have two trackers for this:
Tracker one records the money flowing to you. Keep a record of the cash that comes to you, not just in terms of notes and coins, but also cheques and bank transfers. Also, track the value you receive.
What do I mean by value? For example, you go out for lunch with a friend, and they pick up the tab. When they do this, it is as though they’ve given you the money so that you can pay for the meal that you would have been paying for anyway.
The second tracker is your spending. This tracker helps you see any patterns to spending and anything that is no longer needed.
Start by keeping these trackers every month for a year to get a good idea of where you’re spending money. Once you fully understand how you actually spend money instead of just thinking, you know, you are taking control of it.
Once you have all this under control, then you can reduce the tracking of your spending to once every three to four months. This periodic tracking allows you to make sure everything is still on track, and you don’t need to make any adjustments.
These trackers are included in my Financial Fitness Journal, which also has space for your monthly budget and your notes concerning your money mindset!
Pay down debt
Paying down debt particularly relates to high-interest debt, which should be tackled first. Start by creating a simple debt reduction plan.
- work out exactly how much you can afford to pay off your debt (your budget will tell you this!)
- ensure you’ve got all the minimum payments covered
- with the remainder of your debt repayment budget, you use this to pay down one debt, one credit card, at a time.
Remember, any consumer debt is keeping you as a slave to your current circumstances.
Ensure you have emergencies covered
To ensure that you have adequate cover for emergencies, you will need to start with funds in an emergency savings pot.
If you do not yet have any savings, then to start with, set yourself a goal to save between £500 to £1000. Such a level of protection will cover you for any unexpected car repairs or washing machine breaks.
This initial level of emergency fund savings is needed even if you are also paying down debt. Then once your debt situation is under control, you can ramp up the emergency savings pot. It would help if you now aim for a fund to cover five or six months worth of your expenses covered in case you become unable to work.
Under this money rule, you should also ensure that you have adequate life insurance in place. You need life insurance to pay off your mortgage and ensure that there is enough money so that your dependents aren’t in financial difficulties if anything happens to you.
Retirement always seems a long way into the future, until suddenly it isn’t too far away.
The sooner you start saving for this event, the bigger the pot of savings will be and the cheaper it will be to get to that amount.
You don’t want to retire a pauper. Or do you? Let’s proceed on the assumption that you don’t. In which case, you need to have plans in place, and you need to get them started as soon as possible so long as it doesn’t take you below the breadline.
This golden money rule concerning money goals ensures that you set them and take action to achieve them. In previous money rules, we’ve covered some already:
- debt reduction
In addition, when you are in business, you also need goals for:
Remember, of course, your longer-term goal of financial freedom needs to be established and then reviewed regularly, say every 90 to 180 days.
Investigate tax-efficient ways in which you can save money
Tax-efficient methods of savings and investments do differ between countries.
Here in the UK, we have tax-efficient savings accounts called an ISA (Individual Savings Account). An ISA account allows your money to grow in a tax-free environment, and you can even use such an account to invest in stocks and shares. This makes this account an alternative way to invest for your retirement if you prefer not to use a regulated pension scheme.
Talk about money
The final of the money rules is to have more conversations about money, even if they feel uncomfortable. Make sure that you’re explaining things to kids, don’t let them learn about money through hearsay.
Also, make sure that you’re having a conversation with your partner. Just don’t be judgmental. That’s the key to having money conversations, realise we’ve all got different views around money and wealth that we’ve brought with us from our childhood. It’s a very emotional topic, and we all have these different views. When we talk about our money and work through any differences, and actually understanding how your partner views money, this has a positive impact not just on your financial situation but also on the health of your overall relationship.
So to recap, the ten money rules are:
- Live below your means
- Make sure that you have a strategy for saving
- Create and implement a budget
- Track your finances
- Pay down debt, particularly high-interest debt
- Make sure you’ve got your emergencies covered
- Plan for your retirement
- Set money goals
- Make sure that you use tax-efficient schemes where they’re available and applicable to you
- Have money conversations with those close to you.
Now, if you have a few areas that are weak in your foundations, then take one at a time and start working them on them. And then, over time, your foundations will become more solid, and you will become more in control of your money rather than money controlling you.