I was sick of being broke.
The reality was, even though I had a successful career helping others with their money, my finances were a mess. I was living paycheck-to-paycheck, not budgeting and abusing credit cards.
Once I made the decision to get good with money, things started to change for me. I’m going to share with you what I believe to be the three most important principles of personal finance. If you follow along and implement everything I share, you’ll have set yourself up for long-term financial success.
Here’s what we’ll cover:
- Setting your financial foundation
- The gold medal of personal finance
- The silver medal
- The bronze medal
- Making it real
Let’s get started.
Setting your financial foundation
In order to become financially successful, you’ve gotta know your “facts.” When it comes to personal finance, your facts are your goals, cash flow, budget and beliefs. On the surface these may seem simple or obvious. But the reality is, very few of us know how much money we earn, how much we spend, the value of our assets, and how much debt we have.
Human beings have the remarkable ability to think about the future we want. We can create plans for bringing that future to life, and begin towards it. The problem is, we don’t do it. I know I didn’t for many years.
And it wasn’t because I didn’t know the importance of goal setting. I simply didn’t do it. What about you?
In service of helping you get crystal clear on the future you want, and to have a practical framework for making it happen, you can access our Goals course for free.
Understanding your cash flow simply means knowing how much money you have coming in, and how much money you have going out. Put another way, how much you earn and how much you spend.
You track this by paying attention and tracking these things on a monthly basis. You may remember using the back pages of a check balance to balance your account. While few of us still do it that way, the idea is the same.
Every month, log in to every financial account you have (checking, savings, credit cards, etc). Not only will you have a better understanding of where your money goes, you’ll also find you’re spending money on things you’re no longer using or getting value from.
The “b” word. There are some odd folks out there who enjoy budgeting, but for the rest of us it’s a necessary evil. I still don’t love budgeting. In fact, my wife keeps our household budget. What I do know is this; a budget empowers you. It helps you to know if you’re on track (or behind) to meet your financial goals. It tells you if you can afford (or can’t afford) something.
Budgets help you know. And in a world full of uncertainty, I welcome certainty wherever I can find it. If you’d like to dig deeper, you can learn about Goals Based Budgeting.
We all have beliefs about money. The majority were either given to us via DNA, or downloaded when we were kids. For many of us, our beliefs about money are negative and can be limiting.
The good news is, we can change them. The first step is to figure out what your beliefs are. If you find you need to make changes, you can start the work required to do so.
The gold medal of personal finance
I’m a giant fan of first principle thinking. First principles are what is true. I’ve spent a lot of time thinking about the most important truths about personal finance, and these are the three I’ve settled on. Because we’re all familiar with the Olympics, I’ve borrowed the gold, silver and bronze medals to reinforce them.
The gold medal of personal finance is “pay yourself first.” If you’re living paycheck-to-paycheck as two-thirds of us are, you know that you often have more month than money. You’ve experienced paying everybody else, and not having any money left over for you at the end of the month. This is a recipe for financial failure.
Before I go any further, I’m not suggesting this will be easy. I’m telling you it is essential and will be worth any short-term pain you experience.
To pay yourself first, you contribute money to yourself the first of every month. This can be done in a variety of ways:
- Set up a direct transfer from your every day checking account to a savings account
- Enroll in your company’s 401(k) and begin making automatic contributions
- Open an IRA and set up automatic contributions
- Open a taxable brokerage account and begin making automatic contributions
How much should you be contributing? While this is important and you eventually want to set aside 20% of your after-tax income to financial priorities, getting started with 1% is better than nothing.
The silver medal
The silver medal of personal finance is “stay out of debt.” Credit card debt crushed me for a long time, and it’s a burden to many Americans. If you’re in debt, you need to create a plan for getting out of debt. If you’re not currently in debt, do everything you can to stay out.
I can’t overstate the importance of this. Credit card debt keeps us stuck and leads to stress and anxiety. To help you get out, you can access our Get Out of Debt course for free.
The bronze medal
The bronze medal of personal finance is “diversify.” You’ve no doubt heard the saying, “don’t put all your eggs in one basket.” That’s what diversifying is all about.
Over the past several years, trading stocks and crypto assets has become a lot more popular due to the rise of apps like Robinhood. While awareness and interest is a good thing, the vast majority of people who invested on these platforms lost money. Why?
Because they failed to diversify and took on too much risk.
Is the potential to make a lot of money greater when you buy an individual stock versus a diversified mutual fund? Yes. And so is the potential of losing your money.
I certainly know the attraction and danger of investing in individual stocks. And I’m not saying you should never do it. What I am saying is this; the majority of your investments should be in broad-based, well-diversified investments like mutual funds or ETFs.
The money in your retirement account should be in mostly well-diversified investments. If you have a 401(k) through your employer, odds are you have access to high-quality options and I encourage you to take advantage of them.
An example of a well-diversified investment is an S&P 500 mutual fund or ETF. When you buy a share of this, you own a piece of the 500 biggest companies on the stock market. So, even a handful of them performed extremely poorly, you won’t lose all your money.
Making it real
I mentioned earlier how this won’t be easy, and it won’t be. But what worthwhile things are ever easy?
It’s important for you to get started. Much of personal finance is time sensitive. The longer we have, the easier it is to reach our financial goals. The shorter we have, the harder it becomes.
The first step is setting the intention. Decide you’re going to get good with money. Get clear on your goals and what that means to you. Then put your plan into action.
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If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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