What universal advice can we give people to improve their finances? Let’s start from a few financial premises that suit any level of financial understanding and that you need to be clear on before we get to the tips themselves:
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It’s impossible to save and/or build wealth, or even to have healthy personal finances, if you spend more than you earn. Obvious as this seems, it’s one of the most common mistakes people make with their money. People don’t seem to understand what living beyond your means really means. In case you have any doubt about whether that’s you, in a previous article we gave some signs that you’re living beyond your means.
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You can’t save or invest much if your income is very low. Look at it this way: money is the raw material you’ll use to make your “financial figures”. If you have little raw material, you won’t be able to make many figures. However frugal your lifestyle, you can’t get much out of very little. That’s why we always say it’s better to focus on earning more money than on saving more, because the amount you can save is limited, while the amount you can earn can, potentially, be unlimited. (Don’t twist our words; I think the point is clear.)
In fact, there’s an easy way to measure the health of our personal finances. We only have to look at how much money we receive passively from our assets. In other words, how much we earn without having to work for it, whether from share dividends, rents or a side business.
Once these premises are clear, we can move on to some vital pieces of financial advice.
Ten financial tips everyone should be clear on
1. Save on the day you get paid
This is one of the most common tips and also the most underrated. Most people still save whatever is left at the end of the month, and that means they save less. In many cases they end up saving nothing at all.
Some personal finance writers call this “paying yourself first”. Call it what you like, but try to have a methodical savings plan.
Healthy personal finances should let you save at least 20% of your salary (although at least 30% is advisable). This means that if you earn €1,000, as soon as you’re paid you should automatically put €200 into savings. With the rest you can start covering your fixed costs, needs and leisure.
If you think you don’t have the willpower to set the money aside, you can open a savings and investment account where the bank automatically takes that money, as if it were a loan instalment, and moves it into savings. Although there are other savings vehicles, in Spain these products are known as PIAS, or Planes Individuales de Ahorro Sistemático (individual systematic savings plans).
2. Beware of financial advice from people who want your money
By default, distrust financial advice from anyone who has a nice product for you to put your money into. The clearest example is your bank manager. Often, when they recommend a savings or investment product, it’s not the product that suits you best but the one that suits the bank best.
See also: How to buy an index (investing in index funds)
It isn’t always the case, but a very high percentage of the time they have steered customers towards the option that is least convenient for their own finances. Luckily, today you can find all kinds of opinions online, and one way or another you’ll find different, well-founded points of view.
3. In good times, live as if you were going through bad times
As great investors often say, when everyone else is losing their head, that’s when you need to keep yours.
There’s some logic to this. We can’t save when we aren’t earning money. On the other hand, when everything is going well and money is pouring in, that’s when most people, tired of having lived like they were poor all their lives, decide to start treating themselves to all the luxuries they never could afford.
Well, it’s in the fat years that we need to be frugal, put money aside and prepare for the lean years (which always come). If you don’t, you’ll spend the good times fooling yourself, spending as if you were a financial genius, and in the lean times you’ll come back down to earth. Then you’ll probably regret it, but regret doesn’t fix anything. Anticipation and foresight do.
Only the poor find money a nuisance
It’s curious, but most people’s bad financial situations come about because money gets in their way: they’re uncomfortable holding on to it. And money, as the fictional speculator Gordon Gekko more or less put it, is like a woman who will leave you for someone else if you don’t treat her well.
Most people don’t distinguish between wants and needs, and, contrary to popular belief, the middle class and the poor have more wants than needs. They want so badly to have money to show off that they bring about the opposite effect.
According to a study by the US Bureau of Labor Statistics, the middle class and the poor spend more on leisure, clothing and entertainment than the rich.
Of what you think you need, you probably need less than half.
The next time you have a stroke of luck or a good run, remember to ask yourself: how are you going to prepare for when the bad times come back?
4. Avoid debt
We won’t dwell too long on this point because it’s been covered to death, but we can’t leave it out, because debt is the cancer of personal finances.
First, think about whether you really need to borrow. If you can avoid it, avoid it. Don’t take on debt. If you can’t avoid it, try to pay it off as soon as possible. If you’re already in debt, start doing everything you can to pay off high-interest debts early. If you can’t save enough to do that, look for a second source of income.
Remember to follow some very basic advice when taking out a loan to buy something:
See also: The worst money mistakes people make in each decade of their lives
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First ask yourself: do I really need it, or is it a whim?
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Avoid buying on credit anything whose useful life is shorter than the time you’ll spend paying off the loan. For example, paying for a 15-day holiday with a loan you’ll be repaying for 12 months.
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If you need a loan to pay for something, you’re simply buying something you can’t afford. The question is whether it’s really something you need.
5. Don’t underestimate the importance of a budget
For some reason, people are still reluctant to keep a budget. Well, we can’t properly manage what we can’t measure. If you can measure it, you can manage it.
First of all, a budget helps us see in real numbers where our money is going. Once we see it, we can decide to stop it going to certain places.
Remember to include an “emergency fund” and “long-term savings” in your budget. Don’t mix the two if your finances allow it. And if they don’t, once again consider opening other sources of income.
6. Make sure your life isn’t empty
Most financial problems, and our consumption and spending habits, come from the fact that, in a way, we don’t feel our lives are full.
If we focus on the money that the middle class and the poor spend on leisure, holidays and travel, we’d easily reach this conclusion.
For example, some people only enjoy a holiday if they travel abroad, even if they can’t afford the trip. There’s a saying in finance: “The constant need to travel is the best way to make sure your pockets stay empty.” And mind you, travel can be a pleasant experience with some benefits, but it’s more pleasant when it doesn’t directly damage the health of your personal finances.
I don’t remember who said that the constant interest in and need for travel comes from the fact that many people have built a life they feel the need to escape from.
See also: Seven creative ways to save money
7. Avoid spending a lot of money on cars
A car may be a necessity, but we need to be clear that a car is the worst investment we’ll ever make. A car is a fast-depreciating asset whose value tends towards zero in the long run. So it’s money you’re going to throw away one way or another, and the more you spend on the car, the more you’ll throw away.
Every euro you put into your car is a euro thrown away in the long run. Even if you think you’ll get part of that money back because you can sell the car tomorrow, that isn’t quite true in absolute terms, because after selling it you’ll need to buy another one.
8. Saving alone won’t make you rich
Going back to the analogy above, saving is only setting aside the raw material for your financial figures. If we leave that raw material sitting idle, part of it goes to waste and we can’t use it. We’re talking about inflation, which makes you lose purchasing power over the long term.
The main reason to save is to put that money into investments. You’ll need to choose an investment you’re comfortable with based on your investor profile. Still, since the most effective way to invest is for the long term and without taking too much risk, we once again recommend index funds over other investment funds.
Whether you’re young or don’t have much experience or money to invest, we’ve laid out some simple strategies for investing for the long term and building wealth over time. There isn’t much more to the secret than that.
See also: How to invest when you’re young, with no experience and little money
9. Learn everything you can about finance
Believe me when I say it isn’t hard to pick up the basics of finance and even investing. Of course, it is hard if you’ve never spent any time or reading on the subject.
For complete beginners, I recommend some of the easy reads we listed in our article on financial education and personal finance books.
Some time ago I read the line: “Poverty is just the result of the sum of badly used hours.” And it’s true that setting aside time to learn about finance can be one of the best investments we can make.
See also: Everything you need to know about personal finance in 15 points
10. Be grateful for bear markets and some crises
If you did things right during the fat years (times of economic boom), a crisis can actually benefit you. The rich have taken advantage of these situations for a long time. That’s when they increase their wealth through property or the stock market.
Remember that timing your entry into the stock market is everything, and a recession can give us an ideal entry point. The problem is that for most people, when everything is cheaper, their pockets are emptier too and they can’t go shopping. That’s something else to bear in mind the next time money is pouring in.
My colleague Victoria used to say that every so often the market gives people the chance to double or triple their money, sometimes more. You just have to be ready for when the market gives you that opportunity.
See also: Ten ways the rich think differently from everyone else
Featured image: Rachel Hinman, CC BY 2.0, via Flickr.
