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3 Broad Personal Finance Rules to Follow

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Personal finance covers a wide range of topics and there’s no one-size-fits-all solution to the different issues that people face in their finances. More so, there are tons of ‘conflicting’ personal finance advices online and it could be hard to make smart decisions because of an information overload. Nonetheless, some personal finance rules have been tested and trusted and they will always remain relevant and timeless. This piece provides insight into three rules that can solve some knotty issues in personal finances.

Savings

Squirrels store nuts away for the winter; hence, it will be pure folly for humans not to save a part of their income for the proverbial rainy days. You need to save for big dollar items, retirement, and even emergencies.  One of the cardinal rules of savings is that you should save 10% to cover the basics, 15% of your income for comfort, and 20% of your income for financial freedom. You should also consider saving up three months worth of your monthly earnings in an emergency savings fund.

More importantly, you should strive to push yourself beyond your comfort zone and raise your savings threshold each year. For instance, if you commit to saving 10% of your income every month and you’ve kept the habit up for one year; saving 10% would have become comfortable for you. Hence, you should attempt to prune your expenses in the hopes of raising your savings to 12% or 15% of your income.

More so, if you get a raise or you secure another job with a higher pay, you can choose to save the increase in your income instead of allowing lifestyle inflation to raise your expenses because you now have a bigger paycheck.

Investments

To start with, you need to know your risk tolerance before you start investing. Yet, many potential investors tend to forget thinking about how much risk they can stomach when they jump into the market. In fact, new investors tend to throw caution to the wind if they are joining the market during the upward cycle of a bull run. Peter Richardson, an analyst at 24option submits that “investors ought to decide how much they can afford to lose in a market crash before the market starts showing the signs of an impending crash.”

It is also important for investors to be proactive and make informed decisions about asset allocation. One of the tested and trusted rules of asset allocation is that you should only invest  X% of your portfolio in stocks, where X is equal to 100 minus your age — you can invest the reminder in low-risk investments such as bonds. You should also make sure that you diversify your portfolio and you should never put more than 10% of your savings in your employer stock because you’ll be putting your job and your savings inside the same basket.

Expenses

An irrefutable rule of that you must follow on the path to financial prosperity is that your income must always be higher than your expenses. Hence, you must find ways to prune your expenses and stick to a budget so that you don’t overspend beyond your means.

However, when people think about cutting expenses they only focus on reducing money spent on lunch and cutting out coffee. Of course, you can save a tidy amount if you don’t buy lunch and coffee – but the savings won’t probably make much of a difference on your finances.

Watch you minor expenses but don’t forget that the large expenses will leave the biggest dents on your finances. You cannot afford to underplay the influence of big purchase on your overall financial health. Of course, you can save up money for big purchases instead of buying them on credit; yet, you’ll most likely be pouring the saved funds down the drain of you allow your ego to dictate your wants in keeping up with the joneses.

 

 

 

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