Since starting Hale Financial Solutions, I’ve had a lot of conversations with individuals and families about living financially smart.
This got me thinking: If I had to boil down a smart financial life into five key points, what would they be? (By the way, have you ever noticed the little key in my logo? It’s there for a reason! But I digress…)
Inspired by this article where financial blogger Ben Carlson shares his 20 rules of personal finance, I decided to put my own, shorter list together. So here we go.
HALE FINANCIAL SOLUTIONS’
5 KEYS TO A SUCCESSFUL FINANCIAL LIFE
1. Maintain a simple budget
I believe every person or a family would greatly benefit from a budget. I know, I know. They can feel like a pain. But despite what you may believe, budgeting can be easy and fast.
Our family budget takes thirty minutes to update each month, we get automatic reminders to review it, and we’ve always maintained one regardless of whether I’m in a period of financial "feast" or "famine."
Perhaps the biggest benefit to having a budget is to work towards financial goals. A well-developed budget or online budgeting tool (I use Mint, personally) will allow you to allocate additional cash flow toward financial goals like vacations, retirement, or college savings for your kids that may otherwise require a credit card.
Key Takeaway: Budgets help us do meaningful things with our money. Everyone needs that!
2. Don’t live within your means, live beneath it
While living within your means is a good pursuit, doing so tends to leave no room for unrealized or forgotten financial priorities, like buying life insurance or saving for a larger down payment on a home.
To make matters worse, most of us tend to experience a phenomenon called Lifestyle Creep, where our living expenses quickly rise to our income. Don’t believe me? Look at the car you currently drive to work and ask yourself: Why couldn’t I get to work with a similar car as I used in college? Lifestyle creep is why.
A concerted determination to always live below your means will keep "lifestyle creep" in check and leave room for more important things.
Key Takeaway: Living beneath your means provides room for forgotten (or ignored) financial priorities.
3. Be careful of how much you spend on the big stuff
There are three purchases which tend to get most of us in financial trouble early on. First, we pay too much for a college education. Second, we finance new automobiles. Third, we buy a home which is too expensive.
I know these are bold statements, but I’ve seen too many families in dire straits because of one or several of these decisions. Too many families look at a home as their primary tool for growing wealth, finance (borrow for) new cars rather than paying cash for older ones, and attend private schools with $40,000 tuition price tags rather than attending state schools or starting at a community college for a fraction of the cost.
Key Takeaway: Being mindful of the big expenses that get most of us in trouble can put you well ahead of the game!
4. Save for the unexpected
A recent survey from GoBanking noted that nearly 7 out of 10 Americans have less than $1,000 in savings. When water heaters break, car engines die, or medical emergencies come up and we’re short on cash, where do most Americans turn? Credit cards.
Building an emergency savings fund can keep you from this high-interest trap. It isn't difficult to do. Automatic deposits to a separate account can help by forcing you to build up some savings. Start by saving $1,000, and then take the next step to cover several months of family expenses.
Key Takeaway: A little cash savings goes a long way when dealing with financial emergencies.
5. Invest for the long run
When I first started drawing and painting as a kid, I was pretty terrible. But I loved art, and always pictured myself working for Disney as an animator. So I kept at it. I was drawing and painting constantly, making small, incremental improvements. After decades of effort, I enrolled in college as an art major and realized that I had become a decent artist. People asked me to draw or paint for them; my work was hanging on their walls!
When you think about investing, always take the long view. Recognize that it will take decades to see any amount of real growth, as I’ve illustrated before in the compounding penny example. Taking a short-term view to investing makes us more responsive to the ups and downs in the market, which inevitably gets us into trouble.
Key Takeaway: Long-term investing takes persistence, but the effect of compounding over time can make a big impact!
So what do you think? Have I missed any points that you would include in your top five? Leave a comment below or on my Facebook page.