Oftentimes, major purchases can bring to light flaws in our financial stability. Whether it is coming up with a down payment for a house, paying for a car with cash, or saving for a family vacation, spending large sums of money can leave us utterly petrified or feeling quite content. If you find yourself among the petrified, finding the humility to recognize the consistency of man’s financial problems leaves you open for the timeless advice provided by the parables in The Richest Man In Babylon.
With all of the chaos and clutter that fills our modern life, the same fears, anxieties and worries about day-to-day finances were felt thousands of years ago during the time of the Babylonian Empire. Even then, the process to gaining financial security could be distilled down to seven manageable rules. Following these rules can change your life.
Rule 1: Start Saving
Well, this sounds simple enough – just save. However, for the vast majority of people in their 20s and 30s, savings can prove quite elusive. Money deposits in the bank account and, for a plethora of reasons, goes right back out. Part of the problem may lie with your approach to savings. Your employer pays you and then you pay for rent, food and transportation. But when was the last time you paid yourself?
That’s right. If you want to start increasing your savings account, it’s time to start paying yourself. For every paycheck you receive, side job you complete, or “help” money your parents are sending – save 10%.
Not only should you start paying yourself, you should start paying yourself first. Make this your ritual and engrain the habit into your daily financial choices. After a while, it will become second nature and your bank account will start to grow, just as it should.
Rule 2: Control Your Expenses
It is easy to confuse the necessary with the desired. Controlling your expenses is, perhaps, the easiest way to pay yourself 10% of all that you earn. The most difficult part of culling your expenses is realizing that your salary and lifestyle expectations may not be as correlated as you once thought. Additionally, as your salary increases so does your appetite for consumption.
Curb your “necessary” expenses. You might need to sell your car to eradicate your monthly car payment. You might need to move to a different apartment because your rent is eating up more than 25% of your take home pay. You might need to start cooking at home because dining out is consuming your cash.
As with most changes, the difficult part is in the pain of switching. Once you begin scaling back your expenses, the things you thought you needed don’t seem to be quite that necessary. Watching your savings account continually increase, for some reason, helps ease the pain.
Rule 3: Multiply Your Gold
The fun part about starting to build your savings is that you can begin putting your money to work. You work hard enough. Give your savings full-time employment.
If investing is new to you, don’t worry. The fact that you are investing is what is key. Find yourself a profitable investment and ensure that it keeps putting more money into your purse.
Rule 4: Protect Your Investments
For those new or experienced to investing, it is paramount to protect your principal. By its very nature, investment has a degree of risk. Part of your strategy for investing should be risk management.
Avoid the Siren’s song of quick and easy returns. Be diligent and patient in your investments. Seek counsel from an investment professional or advice from seasoned investors.
Rule 5: Make Your House An Investment
Owning your own home is part of the American Dream. However, for people in their 20s and 30s this dream is proving to be just that – a dream. Once you have paid off all of your debt, you should start saving for a house. Create a plan to save for your down payment.
Keep in mind what you have learned by controlling your expenses and be reasonable about how much home you are actually buying. Purchasing a condo can be ideal for a first time real estate purchaser (they are typically more affordable than houses). While you typically can’t afford the “perfect” first house, if you take the time and capital to invest in your house you can accumulate equity. When it comes time to move you now have the option to keep the condo or house and rent it out once you own it. This increases your earnings.
Rule 6: Ensure a Future Income
Retirement – that seems like a long ways off. Hopefully for you it won’t be. If you start saving for your retirement when you are young, you can provide yourself with the necessary nest egg to actually enjoy it.
Automating your savings throughout your career is the easiest way to accumulate retirement savings quickly and effortlessly. Out of site, out of mind, truly works when saving for retirement.
Whether you are contributing to an IRA or 401(k), try maxing our your contribution. Get used to not having too much cash and tuck it away for another day.
Rule 7: Increase Your Future Earnings
Invest in yourself. This doesn’t mean you need to go out and get an advanced degree. It does, however, mean that you should take the time to learn your trade and profession outside of your daily routine.
Read articles, attend seminars, and study topics that increase your knowledge and earnings potential – put that knowledge to use in the workplace and this will ultimately increase your earning potential. Build what Cal Newport, author of So Good They Can’t Ignore You, calls “career capital” and increase your earnings over time.
While everyone’s financial situation is unique, the laws of personal finance are universal. Focus on the wisdom given to us from previous generations and pass it along as you change your financial habits and build wealth.