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Watering a money tree
As a young man raising a young family, I found the first few years of married life daunting, especially when it came to paying bills. Unexpected expenses always arose, and despite our best budgeting efforts, the money often didn’t last through the month.
My father, who was an accountant, laid a wise piece of advice on us: “Always pay yourself first. The rest of the bills come after.”
By that he meant we should start building a reserve and look ahead to the future. That wasn’t always easy and sometimes we didn’t pay ourselves very much. But the practice became a habit and the habit a lifestyle, giving us the economic cushion we previously lacked and changing life for the better.
Come to find out what I thought was my father’s personal nugget of accounting wisdom was one of the pillars of personal finance, an all-encompassing term that refers to every aspect of money, from savings to spending, investments to insurance, and all points in between. Whether you have more money than you’ll ever need, or a greater need than you will ever have the money to meet, you must get your hands around your financial situation and manage it to the best of your capabilities. Ignore your income and it will surely go away.
Literally and figuratively, money is the currency of life, what gets us through the day, the week, the month and the year. It helps feed and shelter us, entertain and educate us, and gives us the freedom to more closely live the lives we want to live. Manage your money and make it work for you and you may spend less time and effort working for the money. And that’s as worthy a goal as there ever was.
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The Other Personal Finance Pillars
Pay yourself first remains my first and favorite credo, probably because it got us on the right track in life. That monthly payment helps build the foundation of your personal financial security, as well as providing you with funds for unanticipated expenses or well-deserved relaxation. It all depends on how you manage that money—and all your money, really – as to whether you will have what you need when you need it. But there’s more to the story.
Know your income and match it with your priorities. No matter how much you make you will never have enough to do everything you want. That’s as much the fault of human nature as it is financial ignorance. But knowing where you are in the world, at least in terms of financial capabilities, gives you better understanding and greater control over your financial well-being. And that’s a key to personal success.
Establish a budget, whether its formal or informal, so you have a mechanism in place to help you manage your money. If you need a guideline follow the 50-30-20 rule: spend 50% of your net income on daily expenses; 30% on shopping, outings and leisure activities; and 20% on paying down debt, investing for retirement and other long-term goals.
Speaking of paying down debt, carry as little as possible on your personal books. Borrowing money is not free, and you always pay back more than you’ve borrowed. Some borrowing, such as home mortgages, are inevitable for most of us, but the less debt you carry, the better off you will be.
And the less debt you carry also means the better your financial score will be. Lenders like to see borrowers who manage their debt effectively, and they’re willing to offer lower-interest-rate loans to borrowers with better credit scores. Whether you want to borrow or not, the credit score acts as a report card of your financial management capabilities, and a high score may be an indication that you have at last arrived.
Is That All?
That’s most of it. All of these steps will help you better reach a level of financial security now and in the years to come. One of the top fears of old age is the fear that you will outlive your money and become a burden to family members. If you start paying yourself first and tuck that money away there’s a better chance that you will still be financially sound when you reach life’s finish line. By then, of course, money won’t matter to you. But maybe what willmatter to you is that you’ve managed your finances—and by extension your life—in the best way possible and that you and your family will benefit from all that effort. And that knowledge is better than any credit score.
