Common sense finance should be easy, right? But it’s not. Human nature and our inherent weaknesses cause us to make serious, expensive financial mistakes. What are the most basic, yet also most important financial tips that we would want our kids to follow? Some of these tips are painfully obvious, and we’ve included them here, but many of us still ignore them. You’re very welcome to add your own of course, in the comments section!
1. Set a Budget and Stick with It
One of the most basic rules of all, setting a budget – and sticking with it – is the best way to avoid unnecessary spending and debt.
2. Spend Less than you Earn
In this respect, financial health is very similar to physical health, where you need to keep a balance between how much energy you spend/consume. Just like we struggle with resisting food temptations and not consuming more calories than our body needs, many of us struggle with the temptation to spend more – sometimes way more – than we earn.
3. Avoid Bad Debt
This mainly addresses credit card debt. There’s nothing good about this debt, which tends to quickly snowball out of proportion, making it extremely difficult to pay off. Avoid it at all costs – even if it means you can’t keep up with the glitzy neighbors.
4. Forget about Keeping Up
Trying to keep up with others is one of the quickest paths to financial ruin.
5. Have an Emergency Fund
A well-funded emergency fund is the only way to make sure you are never forced to pay with credit for sudden expenses that you can’t afford.
6. Don’t Get Attached to Stuff
Important: family, friends, memories.
7. Be Prepared to Work Hard
People are supposed to work hard. It’s good for us, mentally and physically. Don’t treat work as a necessary evil. Think about each day you work as a day you stay alert, interact with others and contribute.
8. Try to Work at Something you Love
Money is important – very important – but it’s not the only thing that matters. If you can find a way to turn your passion into your career, do it, even if it means earning less.
9. Save for Your Retirement
The Great Recession changed the definition of “retirement.” Many baby boomers plan to work longer than 65. Some have no choice. But you should still save for your retirement, because your earning potential does go down after a certain age, and at some point you simply might be too ill to work.
10. Max Out Your 401(k) Up to the Employer’s Match
If you’re an employee and your employer offers a match on 401(k) contributions, take full advantage of this free money.
11. Pay Yourself First
If possible, set up automatic deductions from your paycheck. Your goal is to save at least 10% off each paycheck.
12. Pay Bills on Time and in Full
Avoid late fees, interest payments and fines. If you have a budget and stick with it, this should be completely doable.
13. At Work, Don’t be a “Good Girl”
This tip is women-specific, because women, on average, tend to hesitate more about asking for a raise or asking for what they deserve in the first place. But it applies to men too: if you believe you deserve a raise, just ask for it. But be prepared to show, in tangible terms and numbers, how you have contributed to the company over the past year.
14. Protect Yourself from Identity Theft
Destroy private records and statements, safeguard your social security number, secure your mail, use an up to date firewall and virus protection on your computer, review your credit card statements carefully and monitor your credit reports.
15. Go to College – But Not Necessarily to an Elite College
College graduates do earn more than high school graduates, and their long-term career prospects are generally better, but as college education becomes more and more expensive, and more and more detached from other fundamentals such as inflation and wages, elite colleges with their sticker price of $200,000 for a 4-year degree simply don’t make sense anymore. The Return on Investment on these degrees has become highly doubtful.
16. Home Ownership is NOT a Must
In most cases, your residence is not a good investment. By all means, buy a home if you can afford it and if home prices in your area are reasonable. But don’t expect to make money from your home, and don’t feel that you have to buy even if the market is in bubble territory.
17. Buy Used Cars
New cars depreciate quickly during the first year. It’s almost always better to buy a slightly used car. These days you can head straight to the dealership and get a certified, pre-owned car that comes with a warranty. You will pay more than if you buy an older, used model off an ad on Craigslist, but you will have more peace of mind, and you will still save compared to buying a brand new car. Here are more ways to save when buying a used car.
18. You Absolutely Must Have a Health Insurance
A high-deductible plan is fine, but you must protect yourself against financial ruin in case you become seriously ill or get in an accident. For the same reason, you must have basic auto and renter’s or homeowner’s insurance.
19. Teach Yourself the Basics of Investing
Investing is not rocket science. You can certainly teach yourself the basics and use that knowledge to take care of your own portfolio and to avoid relying on financial advisers with dubious intentions.
20. Invest Wisely
Don’t view investing as a game. It’s your future. Invest for the long term, age appropriately. Diversify, don’t panic when the market loses value, and insist on low fees.
Care to add any tips? Maybe together we can turn this list into “Top 100 personal finance tips.” 🙂