3 Basic Principles For Good Personal Finance Habits

There are three basic principles surrounding good personal finance habits, and they are:

* Live Within Your Means by Spending Less Than You Make

* Making the Money You Do Have Work More For You

* Anticipating and Preparing for the “Unexpected”

Living Within Your Means

Everyone talks about living within your means, which simply means that you spend less than you make, you avoid excessive debt and you save money. The concept is easy to understand, but judging by the number of people who spend more than they have – not so easy to apply!

Living within your means involves knowing where your money is going for the everyday spending – but it also applies to the big life purchases, like buying a house or renting, the decision to have (or not to have) children, deciding your location, and what kind of car to drive.

Making Your Money Work More For You

Making small changes can maximize your savings without having to modify your lifestyle much. For instance, if you have good financial discipline, it may make sense to use a rewards credit card for every purchase and payment during the month. Paying it back in full at the end of each month means you have a 30-day interest free loan every month, you earn more rewards from the credit card company, and it’s easier to see where your money goes each month when you view your transaction records.

Upgrading your bank account to one with higher interest or no fees can make or save you a lot of money over time. Try to invest money in accounts that will give you the most interest for the length of time you’re able to leave the money untouched in the savings and watch the magic of compounding interest. Get into the habit of paying yourself first, automatically – every single pay period.

Check over your existing bills carefully and look for ways to save money – typical expenses that people pay too much for include cable television, phone and cell phone service, and utility bills.

Anticipating and Preparing for the Unexpected

Many people claim not to have money to repair their vehicles when it breaks down because it was “unexpected”. When the furnace in the house dies and requires replacing or maintenance – people claim it was unexpected and therefore they don’t have the money to take care of it.

While we may not know exactly when these events will occur- we know that these types of “unexpected” events DO occur, without fail. So they aren’t really “unexpected”.

Anticipate and prepare for these events by setting up an emergency fund. This is an account that gives you a way to keep going and stay on your feet when disaster happens. If you can, set aside three months of living expenses, but if you aren’t there yet- just keep putting aside as much as you can into your emergency fund until you reach that number.

It’s important to recognize the emergency fund is separate from your savings account – it’s not used for vacations and it’s not used for investments. Your emergency fund is meant for all of those “I didn’t know it was going to happen” type events that typically lead people to take out loans, use credit cards, or borrow from friends or family.

Save money for your emergency fund in an account that you can access as needed – but in one that will also earn interest to better maximize your money.

Personal Finance: Sound Money Habits To Start Now

“I just got my tax refund, it’s time to go on a vacation!” I can’t tell you how many times I heard this growing up and now see daily on social media. I recognized early in life that the way I managed money was very different than most people I knew. It has always puzzled me because I never quite understood how people could spend money without ever giving a second thought to saving or retirement. Following are some basic habits you can start now to help secure your financial security in the future:

1. Saving for retirement as early as possible is the most beneficial thing you can do. Even if it is just $50 per month, which is the minimum for most plans, you could be setting yourself up with thousands upon thousands of dollars at retirement. The earlier the better. For example, a 25 year-old who saves $200 a month until age 65 and earns exactly 6% on saved funds annually would have accumulated around $400,000. But a 40 year old contributing the same amount each month at the same earnings rate would have accumulated only $139,600 by age 65.

2. Never carry a balance on a credit card with an interest rate. This is one of the fastest ways to build an amount of debt that could burden you for the rest of your life. When you do need to use credit and you’re unable to pay in full each month, seek out a 0% interest card. Many promotions are from six moths up to a year or more. If used responsibly, they are essentially a free loan. Just be certain to pay their entire balance before then end of the term or you’ll end up with retroactive interest that could add hundreds of dollars (if not more) to your obligation.

3. Instead of buying a new car or a lease, try to save up and buy a good used car for cash. What you save between interest, depreciation, taxes, plates and insurance will save you thousands. According to Edmunds.com, buying a car that is two years old is your best bet because you avoid the biggest depreciation drop. Owning it for three years and then selling will also benefit you because you see another large drop after year five due to long-term maintenance that is generally required at that point. If you cannot afford a two-year old car without having to borrow, then getting one a little older with the long term maintenance repairs done (and low miles if possible) is your best bet.

4. Avoid eating out if you can. The average American eats out 4-5 times per week spending on average $232 per month or about $2,700 per year. If you skipped eating out for two years you would have actually saved enough to buy a good used car like point three above.

5. The last thing, and arguably the most important, is thinking long-term. The worst way to justify spending is doing so on an individual basis versus the monthly or yearly aggregate. Take eating out for example: while it might only cost you $10 a meal, don’t fail to consider that if you did this three times per week for a year, you would have spent more than $1,400. This same logic can be applied to virtually anything-clothes, vacations, furniture, coffee, expedited shipping etc. Anytime you’re about to spend money think to yourself, okay, how much will this end up costing me each year.