The idea that you want to become financially successful and actually achieving financial success are not necessarily linked. Sure you aren’t likely to get one without the other but the road is littered with those who had the dream and never made it. There’s a reason for that or should I say multiple reasons. It’s mainly because financial literacy isn’t a priority and isn’t on the agenda when you’re growing up. Without that, you are wandering around in the dark. It’s like trying to write a book and not knowing how to spell. It simply can’t be a success!
It doesn’t matter if you are working toward FIRE (Financial Independence, Retire Early) or you are finding your way to the financial security and eventual comfortable retirement that comes when you hit your 60s or 70s. Pretty much everyone is looking for financial success in life. But how do you find it?
Even if you are getting off to a late start in your quest for financial security, you still burn for it. If you want to achieve financial success, there are some basic must-follow rules. I have eight rules to help you reach that financial security that you want so badly.
What Retirement Tells All of Us
Now that I am in full retirement mode, I can easily see where I went right and where I went wrong on my path here. That’s why it is good to at least listen to someone who has had the experience on the road to retirement and can offer you what is hopefully sage advice.
From time to time, your financial plan is something you may utter out loud to yourself, family, and friends, but more often it’s just inside your head and tucked away behind the things you do in life and at work. After all, it is a big reason you look for a good job and work hard in the first place, isn’t it?
That’s why it is a requirement to get grounded and know what the basic principles are to help get to your goals.
8 Rules for Your Financial Success
Here are my 8 “must-follow” rules to help you on your way:
1. Spend Less Than You Earn
Eliminate your debt. How? This first principle of good finances is maybe the hardest one to actually accomplish. But how do you begin to do it?
Begin with controlling your spending and then start using the idea of saving what you get when you spend less than you earn. Begin with taking that saving and putting it toward paying off debt!
As hard as it may be, it is absolutely the most essential first step to follow to get to your financial success. Pay off and get your debt under control.
2. Learn the Difference Between a Need and a Want
It may sound like some kind of religious mantra, but you must learn the differences between a “need” and a “want” and to master it. For instance, you may “need” a reliable method of transportation to move from one location to another, while you “want” the newest luxury-model automobile with leather seats, GPS system, and chrome wheels.
You get the idea here. If you are just beginning the path to financial security, you can’t ignore the spend more than you earn rule. You just can’t. Use your money for essentials and save the excess for your future. You can’t afford extravagance until after you’ve reached your financial goals.
* The additional good news is that when you spend less on wants, it can reduce your debt and that builds your credit score. If you don’t think that is important, you are way off base because your credit score has a lot to do with very important things you will need like getting a job, the rates you pay on auto insurance, getting an apartment or buying a home or car, etc. With poor credit, all of those things are more difficult.
3. Track and Budget Your Spending
To achieve your financial goals, you need to track your finances and know where you spend your money. It’s the only way you’ll be able to control your money.
Once you have done some tracking, you can set a realistic budget so that every dollar has a job (don’t forget to pay yourself first by saving at least some). Then keep tracking to make sure you stay on budget and make the necessary revisions that everyone has to make. By the way, debt payment is a line in your budget until it’s gone.
Organizing your finances helps you to create wealth. Credit cards, bank accounts, personal loans, brokerage accounts, mortgages, car loans, and retirement accounts should all be tracked regularly. Budgeting software or apps can provide complete solutions to track all such accounts.
It’s not really complicated. You need to know what you have and what you do with your money or you can’t get to your goal.
4. Save for Retirement and Start Right Now
It doesn’t matter whether you’re FIRE or not, I can’t emphasize this more than I do. You should begin saving for your retirement when you get your very first job.
Why? Because when you do that you have the exponential advantages of time on your side to earn, save, and repeat for decades that can insure you have enough to comfortably retire, even if that is when you are in your 60s.
You can’t rely on just Social Security; it wasn’t ever intended to be your sole source of support in retirement. If that’s what you think, then think again.
Take advantage of the time value of money. You can start small in the beginning, but just start.
When you get to the point that you have money that you can actually invest or risk in something that can lead to an “early” retirement, that money will be there and have grown to a much more substantial amount!
When you work for someone else, take advantage of any employer-offered matching fund plans for retirement and accept that “free money” with glee! In some cases, employers will match your dollars up to a specific percentage in their company-sponsored plan. Ask about it and take full advantage of matching funds because it is a spectacular deal.
5. Establish an Emergency Cash Fund
Bad financial things can and will happen to you. They happen to everyone. You need an emergency fund and that fund should be at least an amount equal to a minimum of 3 months’ expenses in cash or a savings account. In other words, if you need to spend $4,000 a month to cover your expenses, have a minimum of $12,000 saved before you begin to consider other kinds of investments.
While this amount may seem to be high, you should keep in mind that the average duration between jobs lasts months. It does not make financial sense to invest funds which might be needed with little notice in investments that move up and down in value like the stock market because you are risking that it will be at a low point when you need to liquidate.
6. Trust Your Instincts But Get Expert Opinions
No one has your interests in mind to the same degree that you do. You will be the ultimate beneficiary or victim of your financial decisions or those made on your behalf. For that reason, you should seek out professional opinions of financial experts when and if they are available. Even reading about them on the internet is better than just plunging ahead without any guide.
Sometimes, mentors are available that have had experiences they can share that can help you. It’s human nature that people like to talk about their successes and even help others, but use your common sense. When things seem just too good to be true, use caution. Success is usually accompanied by hard work.
But follow this rule as well: never take or agree to any advice or investment actions that you do not fully understand and are in total agreement with. If you are unsure, do not agree to do things that you do not understand. Like you would with a medical issue, get a second opinion.
7. Know Your Risk Tolerance
If financial success were guaranteed, everyone would have it and there would never be any anxiety amongst us about money. But that isn’t the way it works.
That’s why the ability to accept the unknown and to cope with the unexpected (such as wide swings in the stock market) is often referred to as “risk tolerance”. Everyone has a different level of risk tolerance.
What would happen if things went sour with your money, investments, etc.? What would you do? What can you tolerate or be prepared for?
If you have any investment or might be considering an investment that will keep you up at night worrying about its outcome, avoid it or get rid of it.
8. Diversify Your Investments to Balance Risk and Reward
After you have adequate insurance and emergency funds, and started saving for your retirement in an employer-sponsored plan, it’s time to consider other kinds of investments.
Common stocks and mutual funds are popular with beginning investors, since their prices are readily available and securities can be easily purchased or sold. Even parts of shares can be purchased these days so investment can start small and be fairly inexpensive to do too. Despite the ups and downs of the markets that you see every day, over time the markets will go up! This is just another example of being in it long term and not looking for only quick success.
You can access, manage, buy, and sell your own investments at very little cost or even for free. Or your portfolio of stocks can be managed by a highly-trained professional manager with a public track record if you desire. But the important thing is to always diversify your holdings so that any one segment of the market that performs poorly will not have major impact to your overall finances.
Just a quick note here: As an investment, the best form may be home ownership which provides you (and your family) a place to live that can also mean equity and financial security as well. That part of the “American Dream” is still very much alive. Homes tend to increase in value and become a big part of someone’s net worth.
Have patience on the long road to financial success. Whether you’re just starting on the road to financial security, or a middle-ager looking at your financial picture and your upcoming retirement, these keys can help you put yourself in a more comfortable financial situation.
Remember, achieving real financial success often takes a big chunk of time out of your life, and there are few shortcuts. If you’ve made good choices and have avoided most of life’s financial disasters, you will spend the rest of your life living on the fruits of your hard work and your good decisions and look forward to a great retirement ahead.
Are you preparing for financial success right now? When did you begin and what kind of financial freedom do you require to make it to your goals? Have you a plan, and what is it? Write it down and practice the skills you need to achieve it. Remember the must-follow rules every day.