What are the most fundamental rules of personal finance? Here goes!
- Maximize your income. This is the number one rule because too many people believe that \”a penny saved is a penny earned\” and think that being a frugal is the same thing as making money- it\’s not. If you compare someone who makes $50K/year to someone who makes $100K/year, the person who makes $50K/year is going to have a very hard time saving as much as the person who makes $100K/year. There is so much advice out there on how to save money, that some people literally believe that they can save their way to financial freedom. If you think you could be bringing in more income, then you need to investigate those opportunities, because the best way to save money is simply to earn more.
- Don\’t buy vehicles brand new. Buy them used. Most savvy savers recommend searching for used cars with the following attributes: less than 100,000 km (or less than 75,000 miles), listed for under book value. Also, if you live in Canada or other countries where roads are salted during winter, it is a cost-effective choice to undercoat your car every year to prevent it from rusting.
- Never carry a balance on your credit cards. Credit card debt plagues many people who have decided to either spend money they don\’t have, or not pay it off immediately. Credit cards provide you the ability to order things online quickly, but that service comes at a high price. Most credit cards are 20% interest per year, which means that if you have $5,000 of credit card debt, it\’s costing you $83 per month, or $1,000 per year!
- Cook your own meals. A $50 meal from a half-decent restaurant twice a week will cost you and/or your partner $5200/year. One third of Americans eat fast food on any given day. This is not healthy for society and not healthy for your bank account if you are one of these people. Cooking your own meals saves money and protects your body from a variety of unusual food additives found in fast food. If you have to get something quick, make it a healthy option like a pita, sub, Greek souvlaki or something similar.
- Don\’t build bad debt. Know the difference between good debt and bad debt. Real estate is an example of good debt because it has a (good) chance of going up in value. Consumer spending on frivolous household items are examples of bad debt because they have a high likelihood of going down in value.
- Don\’t pay banking fees. Too many banks take advantage of their customers by charging them banking fees, despite the fact that there are a variety of banks who offer free banking (in Canada). A $15/mo bank fee will cost you $1800 over the course of 10 years. Now, compare that to a high (2%) interest savings account that could be making you $200 every 10 years. This isn\’t just about the money either – it\’s about sending the banks a message that you are not just a number.
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