Money Obedience

In a previous post we wrote about basic and time-worn strategies for growing our net worth, and how it may be time to rethink those. The idea we put out for discussion was that a few basic ideas about personal finance should at least be challenged, if not changed altogether. But there are two basic ideas that will withstand the trials of any time, no matter whether the times are good or bad. Here they are.

Rule No. 1: Spend less than you make. This is rule number one for personal finance. At any time in your active working life we must spend less than we make if we want to “stay afloat,” as they say. If we do that consistently over our working lives we will not have to fear tough times since we will be well prepared for them. That is, we will have savings for retirement set aside, we will have a rainy day fund, we will have a history of knowing how to stretch our money to meet our needs and have a surplus left over, and we might even have enough money in the bank to pay for some major purchases like a car (instead of financing such a purchase with debt). Regardless of how well we accomplish this, or how large or small our surplus is, if we spend less than we make, we will feel that much more confident and relaxed about our personal finances.

This may be a simple rule, but it takes some effort to implement. Setting up a budget is the first step. Following that budget and revising it to fit your changing personal circumstances are the second and third steps. There are many free budget planners offered on the internet; there are even more are available for use with a (small) fee. Everybody should be able to find or create some budget planning product that fits his or her individual personality.

Rule No. 2: You have to take risks. I know what you’re thinking: that doesn’t seem at all like sound advice! Actually, it’s not advice at all. It is a statement of fact. We have to accept risk whether we like it or not. Risk is not only a part of our financial lives it is a part of life itself. We take risks with the food we eat. (Anybody? Too much fat, too much salt, sugar? Not enough fruit, vegetables? Eating on the run?) We take risk with the places in which we live. (Potential exposure to radon, mold; will this house be worth at least the price I’ve paid for it when it’s time to sell?) We take risks with the people we love or chose not to love. (Did I dodge a bullet there, or make a mistake I’ll regret later? What ever happened to that long lost love?) We take risks with any means of transportation. (Even walking is risky: on average one pedestrian gets killed every other day in a traffic accident in New York City alone. And we should all know by now that driving is far more risky than flying.) We also take risks with our money whether we like it or not, whether we invest in the stock market or not, whether we know much about finance or not.

So, what are we supposed to do about financial risks since we are exposed to them no matter what we do? The best strategies are to (a) learn all we can about them. (For more information go to financial risks.) (b) Find a strategy that balances the various risks against each other and that works for you as an individual. You may need to seek some help finding that strategy, but always keep in mind that you are the one to whom the strategy must be tailored. (It goes beyond the scope of this blog to discuss such individual strategies in more detail.)

There is one more important point to make about the relationship between Rule One and Rule Two. If you do truly spend less than you make, it will be so much easier to handle the risks involved in securing a financial future. Together, these two rules can help you to live a life free of stress caused by financial worries.