The Ten Commandments Of Personal Finance

The Ten Commandments Of Personal Finance

Though people differ greatly in their financial backgrounds and behaviors, there are some simple and fundamental practices which anyone can apply for a better financial future.

Money management is no simple or easy task. Thankfully, financial management is far from rocket science, and you do not have to be professionally trained to understand your finances and live within your means.

If sound money management is something you seek, then experts at can help: the following tips, all of which are crucial but not ordered by importance, will get you on the right track toward good, long-term financial health.

1. Track Your Money

The first thing you ought to do is understand where you currently stand financially. Use apps on your phone or tablet, Microsoft Excel or just a simple ledger to write down all your income and expenses for the month. It is also helpful to study your bank account and credit card statements for the previous two or so months. This will help you get a sense of your financial behavior, and you might be surprised.

As Robert R. Johnson, president and CEO of the American College of Financial Services, points out, people often underestimate their expenses. This is especially true for the small impulse purchases which you may not even notice. Diligent tracking will put you in greater control of your money.

2. Draw Up Your Budget

Now that you know where your money goes and where it comes from, it is time to create a budget. First of all, you should be realistic: do not take on responsibilities that you cannot fulfill. For example, Robert Johnson recommends making sure that your monthly mortgage payments do not exceed one-third of your gross income.

Another approach to budgeting is the 50-20-30 rule, which holds that 50% of your income should go towards necessities like rent, food, bills, etc., 20% should be allotted for long-term savings and debt repayments and the remaining 30% should be spent on lifestyle choices like traveling, entertainment, etc. Of course, if you cannot save 20% of your budget, do less. Financial expert Rob Berger argues that saving is more important than entertainment in the long run, and that you should aim at increasing your savings by changing your spending habits.

3. Set Financial Goals

Goals are key to effective money management. According to Bank of America's personal finance tips, it is best to separate short-term and long-term goals. You should divide short-term purchases into “must-have” and “wish” lists. If your window gets broken, for example, its replacement should be a must-have, while a fancy gadget would belong on your wish list.

Long-term goals include paying off debt, buying a new home, or saving for retirement. It would be best to write down your longer-term financial goals, order them according to importance and revisit them periodically.

4. Manage Your Financial Behavior

According to Robert Johnson, it is crucial to recognize that your expenses should not expand to meet your income. Too often people use a raise or bonus to justify buying a new car or moving into a larger apartment. While this is tempting, discipline is key: if you what to build wealth, then you should act as though you were not promoted and save or invest the raise or bonus instead.

Getting a grip on your spending impulses is also important when dealing with credit cards. Credit cards are not extra cash, as many believe, so you should not use them to buy something you cannot otherwise afford.

5. Reduce Spending

Сut back as much as you can, beginning with daily expenses. It may seem minor, but every dollar saved on non-essentials nudges you ever closer to your goals. There are plenty of ways you can save money on a daily basis. According to the Legal and General e-book on personal finance, a few practices you can apply are making a list of purchases for a week, planning your menu, avoiding replacement purchases when you can repair or rent and using promo codes, coupons and pooled resources.

There is also a useful tip to avoid impulse purchases. Tom Koszyk, founder of Hologram design studio, believes that while the most common spending-tracking logic suggests writing down purchases after making them, it is actually better to do so beforehand. This way you have time to ask yourself “do I really need this?” and reconsider.

6. Understand Your Taxes

Knowing your tax obligations gives you a clearer understanding of your net worth and helps you to optimize your taxes. Income tax rules vary from to country to country, but you generally need to file tax returns annually, with an exception for those whose income falls below the taxable limit.

It is always good to prepare your tax return yourself and file it in time to avoid penalties. Check whether you are eligible for any tax credit or deductions, find out if any of your income is tax-free, and seek out any government programs that might offer you benefits.

7. Open A Separate Savings Account

If you keep the money you save on your regular banking account, you will most likely spend it sooner or later. Bank of America recommends setting up a savings account, which is likely to have stricter withdrawal rules, as well as asking your bank to make automatic savings transfers every month. Automation will save you the trouble of handling this tedious task.

You can also ask your employer to transfer a portion of your salary to this account. Your savings account is your emergency fund that will protect you from any kind of force majeure. It is advisable to have at least three to six months' worth of your salary in the account.

8. Get Rid Of Your Debt

Start paying off debt as soon as possible. Debt is stressful, it hampers saving and it can lead to more debt. Reducing debt should be among your top financial priorities, or you may end up paying off your student loan while simultaneously saving for retirement.

According to Bank of America, you should first address secured loans with fixed payments. When it comes to unsecured debt, such as credit cards or student loans, go from the highest interest rate loans to the lowest, and avoid paying just the minimum monthly amount, as this is the longest and costliest way out of debt.

9. Think About The Future

If you have an emergency fund, then you are already largely protected. The next step is to get health insurance. Of course, nobody expects to get sick or injured, but thinking smart means preparing for the unexpected. Health insurance is a safety net against huge medical bills that often require loans, and new debt is the last thing you need.

What you really should expect is living a long life, which means you will retire somewhere down the line. According to Robert Johnson, the most important decision an individual makes with respect to saving for retirement is to start – the younger the better. The second most important decision is the asset-allocation decision, that is, the mix of stocks, bonds and cash in the retirement account, which brings us to the next important issue – investment.

10. Invest (and diversify!)

In order to make your money work for you, you should bear in mind two features of successful investment – time and annual return – which contribute to the power of compounding. The longer you invest and the higher the annual return, the more compounding you get. According to Mr. Johnson, young investors often have portfolios with smaller allocations of equities and much higher concentrations of cash.

However, the best choice for young people is to invest the money in a diversified, low-fee, stock income fund. Since 1926, according to data compiled by Ibbotson Associates, the average annual return for large capitalization common stocks is 10%. Government and corporate bonds return around 6%, while cash is in the neighborhood of 3%.


Thomas H. Espy

Thomas H. Espy, real estate expert and journalist at