Financial Stuff Part 2: My Two Rules

When I ranted a bit about Helaine Olen’s book a while back, I promised to expound a bit more on what I have learned and my thought processes.

Let me start with rule number 1: Spend less than you make.

This is obvious, but difficult. Especially with credit being available. The more you earn, the more credit becomes available. It’s easy to think that you’ll pay something off next month or a couple months from now, but it usually doesn’t happen. I learned the hard way by getting into debt and then having to work my way out of it. So I figured out that I needed to get my finances under control and pay my debts off and I worked really hard to do that.

It’s also difficult because we frequently confuse needs and wants. We need a car to drive back and forth to work. We want a new car. We need food. We want steak on the grill. We always have to make choices as to what we do with our money to meet our needs and satisfy our wants. Take care of the needs first, then the wants, but no more than what you earn.

After that, personal finance gets a bit cloudy. There’s a lot of noise about what you should do to get ahead. Some people advocate getting out of debt, including your house, and then saving and investing. Others advocate buying real estate. Buy gold. Buy other things. Everyone has an answer and the answers are all very simplified. I don’t think your finances are ever that simple and there are a lot of methods to get ahead. But I think there’s an important rule that I live by that will help in whatever situation.

Rule number 2: Be disciplined.

This is hard, but it runs through everything you’ll do in your life. Discipline means developing a plan and then sticking to it. Forgoing things that don’t fit into the plan. Putting off instant gratification for long term comfort. Paying bills on time. Saving. Not allowing “emergencies” to derail the plan. If your plan is to save $100 a month, then absolutely nothing should get in the way of that. After some work, saving $100 a month will become easy because you will have developed the discipline and habit to do it. There’s a lot of tricks to being disciplined, such as using automatic payments/savings, paying yourself first, etc, but the key is to be disciplined. Make decisions on purpose and then follow through. This is what has helped me the most. There’s a lot of different strategies and methods, but without discipline they are just ideas.

When I get a raise now, I increase my savings by the amount of the raise or pay down a mortgage or something else that will help me build wealth. I have learned to live within the amount I earn, so when I get more, I’m able to use that to increase my assets. That can be as simple as paying more on my mortgage every month or as complex as buying a business. Did you know that only three percent of people in the US pay more than the minimum payment on their mortgage, ever? I read that recently and it shocked me. We all know that paying extra cuts the principal and reduces the time, but hardly anyone does it.

I don’t know if I picked the right things to do with my money over the last 10 years. I’m sure if I had done something different, I could have made more money. But it really doesn’t matter. The important part was I formed a plan and worked it. My plan included building my retirement accounts and maxing out my 401k contribution. Two years ago was the first time I maxed out my contribution. And now that I have done it, I will always do it. It’s a habit. I’ve figured out how to live comfortably without that money every year. It took a while to get to that point. At first I was only doing the 5% I needed to get the employer match, but I kept increasing that amount. Now I put in the 15% allowed and every month I drop a large amount into my retirement. I’m blessed that I earn enough to max out my 401k and pay extra on my mortgage. If you only earn $50,00 a year, it’s tougher to do those things. But I also know a lot of people that earn more than I do that aren’t saving as much.

If you spend less than you earn and are disciplined, then you can really do some things. There’s a lot of options that open up. I believe that you’ll develop the habits that will help you go far and eventually achieve your goals, whatever they are.

And what do Suze Orman, Dave Ramsey, Robet Kyosaki, Robert Allen, etc. have to do with my rules? Stay tuned for that…