So, you want some answers.
- On priorities: I’m 25. What should my financial priority be?
- On saving: How much should I be saving if I earn $45k?
- On spending: Can I afford that vacation next summer?
In three years I’ve written roughly a half million words (about two or three average-length books) about money. I am proud of those words; I like to believe they help readers take control of their finances every day.
Sometimes, however, I flip flop.
I don’t intentionally provide contradictory advice. I simply believe that in spite of all the numbers involved, personal finance is more art than science. I like to point out to readers there are many roads leading from A to B. Some are fast and difficult, others longer but scenic.
But many readers aren’t looking for whimsical debates on the best way to budget; readers want answers. They want somebody to tell them: “If you’re in this situation, this is what you should do, and this is why.”
I get it.
If a reader doesn’t think the advice in an article is sound, they won’t follow it. But readers certainly don’t want to be confused by myriad possible solutions to their problem.
That is why I give you the Seven Precepts to Prosper By:
- Avoid debt unless it can provide, with certainty, a return on the money borrowed.
- Save and invest 25 percent of your income.
- Account for your spending.
- Know what you value.
- Improve yourself.
- Keep it simple.
- Give back.
I wanted to bring all of my own financial beliefs that I write about in various articles together in one place. Not only to showcase my own beliefs about money, but also to provide a starting point for future readers to learn what this site is all about.
I hope these precepts inspire you on your own road to financial peace whether that means being free of debt and having “enough” or climbing higher mountains of wealth.
1. Avoid debt unless it can provide, with certainty, a return on the money borrowed
Like many personal finance writers and speakers, I’m a recovering debtor. Often, we fell before we run. But not long before I started this blog, I realized that debt not only makes us slaves to the banks we owe, but also slaves to our jobs, to the proverbial Grind. Become free from debt and we become truly free.
“A man in debt is so far a slave.” —Ralph Waldo Emerson
If you want to prosper, above all else, rid yourself of debt. After you have saved $1,000 for true emergencies, debt repayment should be your only priority.
And of course, avoid future debt. No credit cards unless you pay them off every month. No auto loans. No store payment plans. No personal loans.
Student loans, some mortgages and business loans can be an investment in your future, but they are still debt, and I recommend people accumulate these liabilities only after careful and informed consideration.
2. Save and invest 25 percent of your income
Once you are out of debt (or at least all of your debt except a mortgage and student loans), it’s time to start saving 10 percent of your net income in an emergency fund (and for future expenses) and 15 percent for retirement.
It may seem like a lot at first, but after a while, two things will happen:
- You’ll get used to living on less, and you won’t miss the money you save.
- You’ll save enough for emergencies and can begin using additional savings for long-term goals like a vacation or a new car.
Believe it or not, saving can be fun.
3. Account for your spending
In a perfect world, everybody would write and follow a budget. People would obsess over Mint.com. Or maybe use an envelope system in which you put the cash you’re going to spend on groceries in an envelope in the beginning of the month and only spend that cash on groceries (and only spend the cash in the gas envelope on gas).
The reality, however, is that most people simply never do this. They may try for a month or two, but following these systems is like following a restrictive fad diet. It may work wonders, but it’s unsustainable. Everybody should make a spending plan (i.e., a budget), but how specific you get is up to you.
Maybe you use a budget spreadsheet or jot down a really simple budget on paper. The important part, however, is to tally up your spending each month and recognize where your money is going. To ensure you are spending less than you earn. Balance your checkbook. There is no excuse for not knowing how much money you have. And there is no excuse for consistently spending more than you have.
4. Know what you value
Money is nothing more than a way to assign a value to things. Those things might include a loaf of bread, a home, a pair of designer jeans, or an hour of your time. And ultimately, true wealth doesn’t come from the number of digits in your bank account balance but from the value you assign to the things in your life. For many, wealth is working as little as possible to buy the must-haves like bread and shelter. For others, wealth is working like a dog to drive hot cars and live at a “desirable” address.
What you don’t want, however, is to work and spend according to somebody else’s value system. If you value going out to dinner—and you can afford it—then go out to dinner. If you value your time and happiness more than a six-figure salary, then quit your job as an overworked law associate.
I would argue that this is the most important precept of all seven, and the sooner you embrace it, the happier you’ll become.
5. Improve yourself
We can’t all be entrepreneurs and there’s nothing wrong with being an employee and earning a paycheck. But there is trouble the moment we simply rely on that paycheck to be there year after year and we stop thinking about controlling our own income.
Imagine you just lost your job. What are you going to do? If the mere thought of job loss sends you into a cold sweat, then perhaps it’s time to take some steps to take control of your income. Although there’s no way to guarantee your job, you can take steps to make yourself invaluable to your employer. In addition, you can continue your education and network to improve your chances of finding new work quickly if you do get let go. Or, you can start a side business to make additional money. And, if you live in a two-income household, you could learn to live on just one salary and save the rest, so if one person loses his or her job, it’s almost no sweat. Ideally, you could do all of these things. In which case, losing your job wouldn’t be so much of a tragedy as an opportunity.
Never stop getting better.
6. Keep it simple
You don’t have to obsess about your money to become financially secure any more than you have to train for the Olympics to get in shape.
A smart money plan can be simple.
Millions of savvy Americans grow quite comfortable with just a checking account, a savings account, and a 401(k) or IRA. They don’t use Quicken, Mint.com, online banking, fancy financial advisors, or even credit cards (they spend cash). They just spend less than they earn and religiously set aside a portion of their income.
The same holds true with investing. Buy low-cost index funds and blue chip stocks for the long term and adjust your allocation every few years. You may need some help to do that, but you don’t need to make it any more complicated.
7. Give back
To some, this means tithing to a church or giving a sizable portion of income away to charity. For others it means volunteering or sitting on non-profit boards.
Always give something back. You can’t truly prosper until you do.
Check back over the next two months for articles that fully explain how I arrived at each of the Seven Precepts to Prosper By and how you can put them to work for you.