There might not be any rules to love and war, but there are definitely some rules to live by when it comes to your money. You might not always abide by them, but if followed most of the time, these rules should give you a fairly healthy financial standing. Of course, everybody has different rules to life they swear by and these are some rules that we have learned through some tough experiences both in our personal finances and in running a small business.
In no particular order, these are our 8 money rules to master.
Buy Assets, not Liabilities
The main difference between assets and liabilities is that assets go up in value over time while liabilities go down in value. Most things we buy day to day are liabilities, like clothing and food. Once we buy them, their resale value goes down dramatically. That’s also true for more expensive items like most cars.
And that’s all good and well as long as we spend money on these things with thoughtfulness and with full awareness of their cost. Some things like food are obviously essential. The problem arises when we start spending money recklessly on things that lose value over time. Some of us are guilty of overindulging in things like expensive shoes, repeated fine dining, and unnecessary fancy cars.
Instead, keep focused on investing in assets that usually go up in value. Invest in your retirement like Roth accounts, stocks, selective real estate, and even your own business. Your future self will thank you.
Save First, then Spend
For many, many years, I looked at saving as an afterthought. When I got paid, I would first pay my bills then go out to spend the rest of the money I had. Eating out and clothes shopping were a priority after paying bills. Then I would look at how much money I had left after all the spending to save. As I learned years later, that order is very wrong.
Savings should not be looked at as the last thing to do. It should be looked at as one of the first things to do along with your bills. You should have a set amount you would like to save every month and set that money aside. Then you spend the money you have left over after your bills and your savings. And when I say savings, it shouldn’t be looked at just the amount of money you transfer into your savings account. It should be the money you put into your savings account, your retirement account, and any other investment accounts you have.
Save first then spend the money you have left over, not the other way around.
You probably have heard mixed things about debt. There is good debt and there is bad debt. In the case of most people’s lives, debt is a bad thing, especially when it’s debt like credit cards, student loans, and car debt.
Revolving debt is especially tough to get out of and hurts your ability to invest as your money will be diverted to paying debt bills every month instead of going into things that will actually make you more money. That’s why most financial advisors will tell you paying off your debt is one of the best investments you can make in yourself. Pay off your debt, starting with the one with the higher interest rate. Or paying off the smallest debt you have first is also another strategy that’s used in the fight against debt.
But what you have to always keep in mind is that getting out of debt is only half of the work. The other half is staying out of debt as much as you can. Some debt like a mortgage or a business loan is more understandable but even those should be taken on with much caution.
Affordability is not Ability to Buy
Should you buy something just because you have the money to buy it? The answer is no!
That’s for multiple reasons. One is what we discussed before about buying assets instead of liabilities, so you would have to consider which one the item is. And another reason is that having the money to buy something, meaning the ability to buy something, doesn’t necessarily equal you affording it.
For example, you might have $5,000 in your checking account and come across a pair of shoes you want that cost, let’s say, $500. Yes, you have the ability to buy the shoes because you have the cash, but can you afford to buy it?
It all depends on what your financial goals are. What else can that $5000 go into? Can it go towards paying down your debt or funding your retirement? Or you might have other goals for that money. So saying you can’t afford to buy something doesn’t necessarily mean you don’t have the money to buy it. It might also mean you don’t want to prioritize it over other financial goals you have.
It all goes to show you that having the cash to be able to buy something doesn’t mean you can actually afford to buy it.
Money Grows Like Trees
How many times did your parents tell you that money doesn’t grow on trees when you were growing up? Maybe your response to them should have been that money doesn’t grow on trees but it grows like trees.
This is a concept that we finally understood through the experience of building a small business and also reading the financial journey of wealthy people.
Growing your money is similar to growing a tree in a sense that both need a lot of time and care in the beginning. When we started our video production company, we did a ton of work for months, sometimes for free and sometimes for very little money, in order to promote our business.
Making our first $500 was exciting! But making the next $500 came easier than the first $500 we made. The same thing happened when we created our website. We posted articles everyday without seeing much traffic or any advertising money. It was after months and months of hard work that we saw the fruit of our labor.
The same rule applies to growing most trees. You initially might have to water the seed everyday, fertilize it, control the temperature, and more in order to make it grow. But once it takes root and grows, you will do less and less work and start to enjoy the fruits of your labor.
This is a concept that drives one of our favorite financial books, The Wealthy Gardner.
Don’t Let Your Money Sit
We talked about saving money earlier on but the second part of saving money is actually investing it. And that has a lot to do with one thing called inflation.
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. In an average year, inflation might go up 2-3%. In recent months, we have seen how much inflation has skyrocketed, driving up the prices of everything from food to housing.
So your money sitting in a bank account is losing value month after month. To combat that, you need to invest it. For example, the average return of the stock market is 8-10% annually. So if you had money invested in the market, you will not only be able to keep up with inflation but you will also be able to beat it. If you have money invested in various assets, as inflation goes up, the value of your assets go up too.
Buy when they sell, Sell whey they buy
This is an easy concept that a lot of people seem to not understand. Or maybe it’s a concept that can only exist if most people don’t follow it. That’s why booms and busts occur throughout history.
Do you remember when everybody and even their pets were buying houses during the housing boom of the mid 2000s? Or the dot com boom of the 90s? Everybody was buying because other people were buying and nobody wants to be left out.
Of course a lot of it also has to do with timing. And the tricky thing about timing is that nobody knows the right timing for sure unless you just get lucky. So the best thing to do is move with caution when you see everybody rushing to buy something. But when you see everybody rushing to sell something, you can feel more confident to shop around and buy at a bargain price. When everybody is rushing to buy something, you can have the confidence to sell something.
It will serve you best to have the rule of to buy when they sell and to sell when they buy.
Continue to Learn
One of the best lessons we can teach you is to be a constant student. Read, listen, ask, research, and keep up with the news all the time. There is so much we learned once we stopped just letting life teach us lessons and became more proactive in learning from others. We picked up books like The Millionaire Fastlane and the Intelligent Investor.
Watching videos like this one is good to get some concepts quickly, but you will be served much better by reading books that take the time to teach you money and general life lessons in depth.