The 12 Financial Rules You Need To Live By

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Learn the essential personal finance rules you need to live by if you want to save more money, build wealth and achieve financial security.

Personal finance has a way of instilling fear and overwhelm. The general message is that in order to be smart with your money you need to hire a specialized financial advisor, an accountant, a CPA for your taxes and who knows who else. Investing wisely is left to the professionals and you must have a high income and net worth to play the game.

The more fear and intimidation can be stirred up, the more money the professionals and financial institutions make. The more confusing it sounds, the more likely people are to hire out the dreaded chore. What they don’t want you to know is that it’s not actually that hard.

I’d like to dispel the myth that managing your finances is a scary ordeal which you are likely to fail at. Therefore, I’ve created a list of 12 simple money rules to live by. These are the simple personal finance guidelines to manage your money, grow your wealth and live a financially secure life.

Follow these financial rules and it’s really hard to go wrong. You will make progress, you will get out of debt and you will build your wealth. Master these money rules and the sky’s the limit. Or, more accurately, your goals constrained by your limiting beliefs will be your only limit.

The 12 Financial Rules You Need To Live By

This list is so ingrained in me and essential to money management that I have a complete article already written for most of these steps. Therefore, I provide a short explanation of the concept, then a link to the article which will provide the thorough “how-to” information you need to master each rule.

#1: Live below your means

The simple fact remains, regardless of income, if you save a portion of everything you earn, you will build wealth and have the ability to retire early.

For example, let’s look at two different scenarios:

Scenario 1:

Joe and Rebecca are high income earners, have a beautiful home in a great neighborhood and drive the cars you would expect to see them in given their high social status. Their combined income is $290,000 annually. They save the minimum necessary to receive employer matched contributions.

I first introduced Joe and Rebecca awhile back in the post Personal Finance: Winning the Team Trophy But Losing at Life.

In order to retire, and enjoy the lifestyle they are accustomed to, they won’t be able to retire for another 46 years!

Scenario 2:

Jack and Diane have a combined household income of $65,000. They save 20% of everything they earn, and have done this since they entered the workforce at the age of 23. At the age of 30 they already had $46,750 saved for retirement, and now consistently save $6,500 every year. They will be able to retire in about 28 years.

Which would you prefer? Live outside your means and become reliant upon your high income or live within your means, save consistently and retire when you want before the age of 60?

(Assumptions: They save 10% of their combined annual earnings of $50,000 until the age of 30. Then they save 20% of combined annual earnings of $65,000. They earn an average rate of return of 6% and account for 2.5% inflation rate. I used this compounding interest calculator.

To read more on the relationship between your savings rate, monthly expenses and when you can expect to retire, visitHow to Calculate Your Net Worth – And Why You Need To.

#2: Save a minimum of 10% of everything you earn

*This post may contain affiliate links which won’t change your price but will share some commission. Clickhere to read my full disclosure policy.

The more money you save, the faster you will build your wealth and the sooner you can retire or become financially independent.

A part of all you earn is yours to keep.
Let it be not less than one-tenth and lay it by.
Make it your slave. Make its children and its children’s children work for you.
-The Richest Man in Babylon

The Richest Man in Babylonis one of my favorite personal finance books. The author presents the core habits necessary to build wealth. What’s the #1 wealth building habit? A part of everything you earn is yours to keep.

Let’s ponder that for a moment. If you live beyond your means, you are using every dollar earned to pay back your debts and cover all your necessary expenses for survival. But that’s your hard earned money! What of that are you holding onto for yourself?

Rather than see that money disappear at the end of every single month, form the habit of saving 10% of every single paycheck you receive. Adjust your lifestyle to get by on the remaining 90%.

If we use the chart from This Is What Your Retirement Savings Needs To Be At Every Age, you can see that at a 10% savings rate, you can expect to be able to retire around the age of 65.

At this 10% savings rate, you can have enough in emergency funds and savings to live without financial stress, and be able to invest and watch your money grow.

Additionally, if you save every pay raise and bonus you receive and resist the societal push for lifestyle inflation, your savings rate will be even higher. Then you can really watch that emergency fund and retirement savings grow.

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#3: Track your finances

You really can’t plan your personal finance path if you don’t know where you are right now. The very first step to taking control of your finances, be it saving more money, paying off debt or creating your budget, you need to track your finances and understand where your money goes every month. Take control of that money and tell it where to go rather than wonder where it all went at the end of the month.

While I listed the #1 money rule to live by as saving a part of all you earn, you may need to focus on tracking your finances before you can start saving that money. If you don’t have money left over at the end of the month, start tracking exactly where every dollar goes, understand your spending habits, then find ways to decrease your spending.

More on tracking your finances and why you should:

The True Cost of Your Morning Latte

How To: Track Your Personal Finances

I Tracked My Finances For One Month: This Is What I Learned

#4: Create a budget

Once you’ve tracked your finances, it’s time to give your money a place to go. Decide ahead of time where you want your dollars going. How much do you want to spend on food and dining every month? How much do you have for clothing and entertainment? How about savings?

Your budget is what will allow you to set a financial goal, such as paying off debt or saving for a vacation, and then find a way to achieve that goal. You have full control of telling every single dollar you earn exactly how it needs to be spent.

This is a liberating and empowering process.

The Beginner’s Guide to Creating a Budget You Can Stick To

Tip: Check out the FREEResource Library,full of personal finance workbooks, worksheets and printables to help you achieve your financial goals.

#5: Buy the home you can actually afford, not the one you qualify for

It’s easier to accumulate wealth if you don’t live in a high-status neighborhood.
― Thomas J. Stanley,The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

Let’s use a hypothetical scenario: You spend years saving money and finally have that $40,000 saved for a down payment on your first family home. You go to the bank to get pre-approved for a home loan. The bank sends you the best letter ever, congratulating you because you qualify for a $300,000 home. Sweet!

You immediately contact your realtor and inform them that your budget is $300,000. And so they start showing you homes listed between $300,000 and $350,000. Because, who knows, you probably have a little more in savings that you haven’t divulged and maybe the seller will go down a bit in price.

You make an offer on your dream home and close for $305,000 (only $5,000 over budget!!) and excitedly move into your happy new home.

You’re new mortgage is $1,840 each month, when you were accustomed to just $1,100 in rent. But that’s okay, you and your spouse have great jobs and can afford the mortgage.

After a few months you realize that you didn’t really account for the increased expenses of owning a larger home. All your utility bills are higher and then you have property taxes on top of it. The water heater went out and you have to replace all the carpets with wood because little Johnny is allergic to dust mites.

What happens to your savings rate at this point? Everything you earn goes towards these increased expenses. Consumer debt builds up over time and adds more financial stress.

If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.
― Thomas J. Stanley,The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

Regardless of what the bank says you qualify for, don’t fall into the trap of owning more home than you can comfortably afford. You doom yourself to extra years working, missed wealth building opportunity and additional financial stress.

#6: Pay down high interest debt

While The Richest Man in Babylon is one of my all time favorite personal finance books, there is one other book that comes ahead for the shear practicality and implementable basics. The Simple Path to Wealth: Your road map to financial independence and a rich, free life by JL Collins holds true to the Personal Finance Rules. I love the debt pay down rule of thumb provided by JL Collins:

If your interest rate is below 3%

Make the minimum monthly payments and pay down your debt slowly over time. Then invest the money you have left over.

If your interest rate is between 3-5%

This is more of a personal choice. Most likely you will come out financially ahead if you slowly pay of the debt and invest the extra at a higher rate of return.

However, there may be emotional reasons to rid yourself of that debt sooner. As an example, Liz from Chief Mom Officer decided to pay off her entire 15 year mortgage early, at less than 3% interest, because the peace of mind of being debt free was more important to her and her family.

If your interest rate is above 5%

Payoff that debt as aggressively as possible. Rank your debt by highest interest rate, make all minimum monthly payments, then apply everything left over to the debt with the highest interest rate. Keep this up until all your debt is paid off.

As an aside, there are two popular debt payoff methods, the snowball and the avalanche. Listing debt by highest to lowest interest rate will cost you the least amount of money in the long run. I’m down with that.

However, personal finance is just that, personal. You may have emotional reasons to payoff some of your smaller debts first, just to knock them off the list and keep your morale going.

How To: Payoff Debt – Like a Boss

#7: Have goals and revisit them often

People with goals succeed because they know where they are going
– Earl Nightingale

Having a general idea of what you want to accomplish is most likely not enough to actually get you there. You need a clearly defined goal, and a clear reason for having that goal, to put in the daily effort required to make progress and achieve success.

The best way to ensure that you are living the life you desire is to write out your long term goals. Think ahead a full 10 years from now and imagine where you want to be in your life. What do you hope to have accomplished by then? What home do you want to live in, what does your family life look like and what do you want to accomplish in your career?

Think about the top things you want to accomplish. Then write them down as goals. They need to be specific, measurable and achievable within your 10 year time frame.

Next, think about what you need to accomplish in the next 5 years such that you will be on track to achieve your 10-year goals. Write those down in goal format.

Finally, what do you need to work on this year in order to set the right path to achieve those 5-year goals. These are your short-term goals.

Your short-term goals can now be broken down into monthly goals, weekly goals, and even further into your daily action steps.

The takeaway concept here is that your daily actions can and should be geared towards your long term success. Otherwise, you’re just mindlessly going through your daily life with no clear plan in place.

If you aim at nothing, you will hit it every time.
– Zig Ziglar

How To Define Your 10-Year Goals And Live Your Best Life

How To Design a Happier and More Fulfilling Life

#8: Build financial intimacy with your partner

Money is such a common source of arguments in marriages. Don’t let this be you.

Instead, make money discussions a priority and an opportunity to share and discuss your future together. Make the time for regular money meetings and be open and honest about your financial wants, needs and goals.

I’ve heard of couples that like to schedule a weekend vacation once a year and use that time to discuss their goals for the year and then establish an appropriate financial budget and plan. Other couples like to discuss their finances monthly, over a date night dinner out. Others set aside time once a week after the kids go to bed.

Find what works for you, with the frequency that works for your budget and finances, and enjoy the process together.

Marriage and Money: How to Talk to Your Partner About Money

#9: Invest in ETFs

Looping back to JL Collins The Simple Path to Wealth: Your road map to financial independence and a rich, free life, this really is the key to simple wealth building. The management fees with typical retirement funds is around 1%. Which doesn’t seem like much. But in retirement you will likely pull about 4% of your investments to fund your monthly expenses. With a 1% fee, you just lost an entire 25% of income. To make things worse, you risk not being able to fund your retirement at all.

Sounds pretty scary, right? It is. But thankfully there are low cost ETFs in our investing tool belt.

What are ETFs?

Low cost exchange-traded funds are a collection of stocks, bonds or other securities that are traded on the exchange, just like stocks. A total stock market ETF, like Vanguard’s VTSAX, allows you to own a portion of every stock in the US, effectively diversifying your portfolio, and the low expense ratio of just 0.05%.

Most employer-sponsored retirement accounts, such as a 401(k) or 403(b), offer low cost stock and bond ETFs. The percentage you choose between stocks or bonds depends on where you are on your wealth building path. If you are young and have many more working years ahead of you, you can be more aggressive and hold 100% stock. If you are about to retire and wish to even out the ups and downs of the market, you can add a percentage of bonds to the mix.

Outside of an employer-sponsored retirement account, you have many additional options available to save for retirement. The lowest fee accounts are with Vanguard. With any investment account, you have the option of low cost ETFs. Go with a total market ETF, such as VTSAX and add a total bond market index fund, like VBTLX, if you want to be more conservative.

For more details on why Vanguard and low cost ETFs are so amazing, be sure to read or listen to The Simple Path to Wealth: Your road map to financial independence and a rich, free life, or visit his blog and stock series here.

For more reading on retirement accounts, visitThe Ins and Outs of Retirement Plan Options

#10: Maximize your employer-sponsored retirement plan contributions

As soon as you set out on your retirement savings / wealth building journey, you will likely have the following question:

Where do I put all this money that I’m saving?

First, take advantage of your employer contributions. Many companies offer to match your contributions up to a certain percent. So if you save 3% of every paycheck to your retirement account, your company with add an additional 3%.

That’s free money! Do your future self a huge favor and take advantage of this benefit. Look up how much your company will match and then make sure you are saving enough each paycheck to receive the full matching contribution.

For further reading on optimizing your employer sponsored retirement account, visit 11 Steps to Rock Your Employer-Sponsored Retirement Plan.

#11: Protect the people you love by holding life insurance

Sadly, I learned this one the hard way.

I was a stay at home mom when my husband passed away. Since he was the one that managed our finances, I was terribly unprepared.

I was under the impression that he had life insurance, but it turned out that he hadn’t set it up yet. Since we had made the decision that I stay home with our son, I didn’t have a way of earning income. I didn’t even have a prior career to fall back on.

A simple term life policy would have allowed me the time to grieve our loss while still maintaining the lifestyle we were familiar with. Without it, I was forced to move back home with my family, take a job I didn’t like and hardly paid anything, put my son in a daycare I wasn’t ready for, and then struggle to find a career training path that wouldn’t put me too deeply into debt.

Don’t be intimidated by all the choices out there and then put this off like my husband did. It’s too important.

The Beginner’s Guide to Understanding the Different Types of Life Insurance Policies

#12: Create a will and family emergency plan

Not only did my husband not have life insurance, we didn’t have any plan in place for this type of emergency.

I didn’t know where all the accounts were or how to access them. I didn’t have any of his online passwords. A full 11 years later and he still has an active Facebook account because I was unable to access it. There were so many small details that we simply never discussed and I didn’t know how best to manage after his death.

The most frustrating thing is that this was all preventable.

Do yourself, and your family, the favor of creating your will and establishing a family emergency plan. It’s so easy to postpone and avoid this, but you simply never know what might happen. Give yourself the peace of mind of being prepared. Just in case.

Learn more about the importance in a family emergency binder and how to create your own at Why You Need a Family Emergency Binder.

Save yourself the time, hassle, confusion and frustration of creating your own emergency plan by downloading the comprehensive In Case Of Emergency (ICE) Binder.

You can read more about my story and what I wish I had known before my husband passed away at Losing My Husband and Financial Security to an Unexpected Death.

Recap

Managing your money doesn’t have to be complicated or stressful. It isn’t a scary ordeal that requires the help of an expensive professional. There are really just a few simple money rules that you can follow which will ensure that you save money, build wealth and achieve financial security.

The most essential money rules are:

Live below your means
Save a minimum of 10% of your earnings, ideally even more
Track your expenses
Create a budget
Buy a home you can afford, not the home you qualify for
Pay off your debt (high interest debt, that is)
Make goal setting a priority
Discuss money openly with your partner and create financial goals together
Invest
Maximize retirement savings
Protect your loved ones with life insurance
Further protect your loved ones by establishing a will and a family emergency plan

Stick to these simple money rules and enjoy a financially secure life. Or maybe even financial independence.

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Need a little extra help getting your finances in order? Take the 7 Steps to a Financial Clean House email course and learn the exact steps you can take to gain control of your finances today. Learn exactly how to track your spending, create and manage your budget, payoff your debt, save more money, set financial goals you can keep and more! Learn more at 7 Steps to a Financial Clean House.

*This post may contain affiliate links which won’t change your price but will share some commission. Clickhere to read my full disclosure policy.