Whenever a person makes a thoughtful decision, it’s usually based heavily on a set of internal principles, whether that person can spell out those principles or not.
Principles are simply sets of internal rules that you live by. They’re usually just a reflection of the things that you value, described in a way that guides your behavior clearly toward the values that you hold dear.
One of my journaling exercises as of late was to make a giant list of all of my principles. I wound up listing about ninety of them over the course of several days. After I finished dumping them all out on paper, I went through them and sorted them out a bit and I found twelve that applied strongly to personal finance (and quite a few more that did in a more secondary way, but if I included all of those, this article would turn into a book).
(An aside: a daily journaling practice is a really, really good practice for ferreting out exactly what you value and working through some of the unanswered questions in your life. My practice as of late is simple – I just open up a journal and write whatever comes into my mind until I fill three pages. It might be inane, it might be thoughtful, it’s usually a mix. Sometimes, I’ll get into a groove and continue a theme over several days, like this listing of principles; at other times, I jump from thought to thought with every other sentence. It always helps me feel more clear.)
What follows are those twelve principles, along with some additional thoughts on each one. These principles are ones that I was forming during the earliest days of Money360, more than a decade ago, and every single one of them holds true today. They all help to guide me toward continuous improvement in my financial state.
The specific application of each principle might change over time, but the core principles remain the same.
Principle #1 – Spend less than you earn over any given period of time.
You should be striving for this over any period of time as long as or longer than a single pay period. It should be true over a pay period, a month, a quarter, a year, a decade – no matter how you slice it, you should be spending less than you’re earning.
Now, this is tricky to actually pull off and almost no one is perfect at it, but I will say that whenever you fall short on that principle, there’s almost always a financial problem lurking there that you can solve. It might be a problem of inadequate planning or a problem of too much impulsive spending or a problem of inadequate emergency preparation, but if you can find a period of time in which you’re spending more than you earn, then there’s a problem.
“But what about times where you’re traveling?” Yes, you’re probably spending more than your most recent paycheck on a well-planned trip, but a well-planned trip involves spending money that you put aside for that purpose earlier on. You should be spending less than you earn each period including your savings for future expenses, and then when those future expenses come along, you don’t actually count the money you’re spending from your savings. You effectively already “spent” it the moment you put it aside for that upcoming expense. We’ll get back to the importance of planning ahead shortly, but when you put aside money for a future goal, you’re effectively “spending” it now.
“But what about when I’m retired?” At that point, you should stop thinking at all about your retirement savings and instead apply this rule simply to the money coming in regularly. Your pension check, your Social Security check, your payouts from your 401(k) and so on should all be a pool of income, and you should strive to spend less than you’re “earning” from that pool. If you do that, you’re probably going to be fine for the rest of your life.
Principle #2 – You are never making a mistake by paying down a debt.
It is never a mistake to pay off debt. If you are unsure as to your next financial move, paying off debt is always at least a good move. It may or may not be the absolute best thing you can do, but it’s always a worthwhile choice.
Yes, there are situations where you have a debt with very low interest and you might earn more interest by putting that money in an investment or a savings account, but there are still two advantages to paying off debt that the other options won’t give you.
First, when you pay off debt, you’re reducing the future interest you’ll have to pay on that debt. You do not have to pay taxes on that reduction. On the other hand, you do have to pay taxes on any gains you make on that investment. So, for example, paying off a 5% interest loan is better than making a 5% return on an investment because you don’t have to pay taxes on the reduced interest whereas you would have to pay taxes on the 5% return.
Second, when debt is eliminated, it directly improves your monthly cash flow by eliminating a required monthly bill. When a debt is gone, you no longer have that bill coming in the mail and you have the freedom that comes with less money that you have to spend each month. This gives you options with that money, a power of choice that you didn’t have before.
Principle #3 – You are often making a mistake by taking on a new debt, so think very carefully before you do.
While paying off a debt is always a good thing, actually taking on a debt is often not a good thing. The reasons for this mirror the reasoning above.
First of all, it means that you’re saddling yourself with a new required regular bill. This means that even more of your income is tied up in required spending than before, which means that a higher level of income is required from you just to keep the bills paid. If you want to be tied to your job, the best way to do it is by pulling out the ropes of debt. Your life’s flexibility is reduced.
Second, almost all debts come with interest, which means that you’re going to be paying back more money than you borrowed. That’s not a good financial choice, as over the long run it comes down to overpaying for something.
This doesn’t mean that debt should be avoided, but that it should be taken on carefully and with great consideration to ensure that the benefits really are worth that cost. Sometimes, they are, as in the case for student loans to earn a degree that will lead to a huge increase in income. Often, they’re not, as in the case of a credit card balance rolled forward or a loan for a replacement car because you didn’t bother to save at all for it (so, in reality, your loan is used to pay for an inflated lifestyle that you already enjoyed before signing the car loan).
Principle #4 – The more you splurge, the less value each splurge has and the more money you’ve spent overall, so spread them out as much as possible.
If you buy something you really enjoy once in a great while, buying that thing is a treat. You’ll enjoy the anticipation of it, the experience of buying it has heightened enjoyment, and you’re much more likely to invest a lot of time and energy in actually enjoying that specific item. You get a lot of value out of your $5 or $20 or $100.
On the other hand, if you buy something you enjoy on a very frequent basis, that sense of a “treat” goes away. It’s still enjoyable, but it becomes much more ordinary. There’s almost no anticipation, no extra joy from actually choosing the item, and you’re probably not going to spend nearly as much time or energy enjoying the thing you purchased. After all, it’s just another thing, much like all the others you’ve bought. You’re getting a lot less value out of that $5 or $20 or $100.
Even more than that, you’re finding that you have to spend many multiples of that $5 or $20 or $100 to get as much joy out of one single expense if you keep those splurges frequent and routine.
Spread them out. Let your pleasurable spending be an oasis of joy in your life, one that gives you joy from anticipation and from the experience of actually doing it, and then because you don’t have nearly as many things competing with it, you’ll spend a lot more time with it afterwards, too.
Principle #5 – Ratchet down your spending on everything until you feel unhappy with the change, then ratchet back up just a notch. And then do it again a year or two from now.
Almost all people with some level of financial flexibility – the vast majority of people in the western world – end up spending an inflated amount on almost everything in their lives compared to what they actually need to get tasks done and feel fulfilled. We do that for tons of reasons: we’re influenced by the media and advertisements, we follow word of mouth (which was originally influenced in the same way), we take the most convenient or most familiar choice at first glance, we just keep doing what we always did.
The thing is, on so many things, we’re spending more than we need to just to meet our needs or fundamental wants for that item. For example, for the vast majority of household and nonperishable food items we buy, the store brand is perfectly fine for meeting our needs, but for a myriad of reasons, most people buy mostly name brands.
There’s a simple way to fix this. Go through your life regularly and ratchet down your spending on everything</em until you feel unhappy with the change. Switch to store brands. Cut out lots of unnecessary expenses. Cut your cable. Start intentionally exploring low-cost and free entertainment and options for your hobbies. Just go through everything and do a big purge.
Then, if you discover that something hurts, rebound. Bring that thing back. Start ratcheting up that spending slowly until you find a level you’re happy with. If you stay in a state of “misery” because you “have to,” it’s very likely that you will rebound.
This should be a somewhat continuous practice, too. Every year or two, you should experiment with ratcheting down spending in each area of your life where you spend money, just to see what spending you’re actually getting value from.
Principle #6 – You’re better off owning a small number of well-made and reliable possessions that you use regularly than with a large number of possessions that you rarely use.
Let’s break this principle down into pieces.
First of all, a smaller number of possessions requires less living space, which means that your housing costs are lower and your utility costs for that space are lower, too. Consider how much of your living space is actually just used to store stuff. Having less stuff means having lower housing and utility costs. It also means lower costs for moving as well.
Second, a smaller number of possessions means that you actually get more use out of each one. Things don’t get shoved to the back of the closet because you’re actually using the stuff you have.
Third, higher quality possessions means that you spend a lot less time maintaining and replacing them. If you’ve made the decision to actually buy something, that means you’re intending to use it quite a lot, and a well made version of that item with low maintenance means that it’ll last a long time and you’ll spend less time keeping it in good working order.
Taken together, this means that the best route for spending on possessions is to own a smaller number of higher quality items rather than a larger number of lower quality ones.
Principle #7 – Consciously investing adequate time and energy into every part of your life cuts off a lot of destructive spending urges.
A lot of spending that people do comes from an underlying feeling that their life is out of balance. Sometimes, it’s easy to identify why – you’re not spending enough time with your kids, for example – and at other times it’s not so clear.
Many people handle that feeling of imbalance by throwing money at the element that feels underserved. If you’re not spending as much time as you’d like with your kids, you buy them things and take them on great experiences to “make up” for all of the things you missed. If you’re not spending as much time as you’d like on your hobbies, you buy more hobby items than you can possibly use. You get the idea.
Often, what’s going on is that you’ve allowed one or two areas of your life to expand and expand until it’s choking off the air from other areas that you care about, and that reckless spending is that section of your life gasping for air.
I’ve found that one really good financial practice is to simply give all areas of your life the air they need to breathe. Literally wall off time each day or each week for all of the major areas of your life – physical, mental, spiritual, emotional, marital, familial, social, intellectual, vocational, hobbies, and so on. What do you do on a regular basis to feed each area of your life? Wall off that time. Schedule it and make it sacrosanct, and if that means letting some other things go in your life, that’s fine.
If you don’t give every notable part of your life some love and care and attention, that part will start screaming for help, and you’ll often end up throwing resources at it in a haphazard way that will probably come with a financial cost. Don’t let it happen.
Principle #8 – If you see an expense coming in the future, even if it’s far off, start preparing for it now.
You know you’re going to have to replace that car in a few years. Start saving for it now so that you can just pay cash for it rather than taking on a car loan.
You know you’re going to pay for at least a part of your children’s college education. Start saving for it now so that you can just pay cash for some portion of it rather than cosigning on a loan.
You know you’re going to need to pay for insurance at some point, property taxes at some point, and so on. Again, save for those things now so that they’re not even a slight concern later on.
It’s easy. Just figure out how much you need to set aside each month to make sure that you can cover each of those expenses. Total it up and then start transferring that amount to your savings account each and every month. Make it automatic if you can; ask your bank to transfer that money automatically. Then, when the expense comes around, take the money you’ve already put aside out of your savings account and just pay for it directly. No debt, no worries, no stress, no anything – it’s just handled.
Not only does that policy avoid a lot of stress, it avoids a lot of debt, too. It also helps ensure that you’re always spending less than you earn (I count money put aside like this as money already “spent”).
Principle #9 – Don’t rely on your future self. Help your future self.
Many adults, particularly younger adults but a surprising number of older adults, assume that they’ll just take care of some issue down the road instead of worrying about it now. My “future self” will handle retirement savings. My “future self” will handle that car repair. My “future self” will actually do some professional development.
Here’s the truth. Your “future self” is going to be older. They’re going to have less energy than you do. They’re likely to have experienced some kind of misfortune. They’re going to look back at the most wasteful moves in their life with regret.
Right now, your life is quite likely in a better state than it will be for your “future self.” Rather than adding even more burdens to your already tired future shoulders, choose to shoulder some of those burdens now when you’re young and can handle it.
Don’t put off saving for retirement so you can do something frivolous. Don’t put off professional development so you can sit at your desk reading Facebook. Don’t put off that car repair because you’d rather go out with your friends a bunch this month – figure out some cheaper stuff to do with them instead.
Put as little burden as possible on your future self. Handle as much of it as you possibly can now without making your life miserable. Take pride in the fact that you’re making your life easier going forward. You’ll never, ever regret it.
Principle #10 – If you’re married, be open with your spouse about every dime spent and make that principle clear before you’re married.
There should be no hidden spending anywhere in your marriage, aside from perhaps some mutually agreed upon private discretionary spending in equal amounts for both of you so that you’re not quibbling over things like buying a morning coffee or how a gift could have possibly been afforded.
As soon as you start to hide expenses from each other, you end up putting a financial burden on your partner that he or she probably doesn’t want. You’re also damaging the trust in your relationship, and you’re almost always guaranteeing a huge fight as soon as that expense is uncovered.
There should never be hidden bills. There should never be hidden receipts unless it is directly due to a surprise using money that’s from agreed-upon discretionary spending. If those things are happening, then there’s a fundamental trust problem.
Obviously, as with all relationships, people can enter into different agreements from the outset, but communicating about money is vital in all relationships and such expectations should be clearly communicated from the start. This type of completely open approach is a great starting point because it ensures that everything is clear, open, and honest from the very beginning.
Principle #11 – Life is going to hand you unexpected events. Be prepared for them.
Your life is not going to go the way that you expect that it will. There are going to be unexpected successes and unexpected failures. There will be joy and pain and opportunities and challenges that you can’t possibly foresee. How can you possibly prepare for them?
One vital step is to have an emergency fund. It’s simply a pool of money that you set aside and feed regularly that is used solely for unexpected life challenges. I strongly encourage people to set up an automatic transfer from their checking account to their savings account, moving at least $20 a week into that emergency fund. That’ll save up more than $1,000 a year, which is going to really help when your car won’t start or the washing machine unexpectedly dies or you have to suddenly fly to Atlanta to visit your ailing father.
Another useful tool is insurance. It exists to handle unexpected events in your life – you pay a little each month and then when that type of event comes along, it steps up and helps pay for it. Most Americans have some form of medical insurance, and homeowners typically have homeowners insurance, and automobile owners usually have auto insurance. In addition, you should consider a term life insurance policy for anyone in your family whose passing would cause an undue financial burden on those who remain.
Life is going to go in unexpected directions. You can take care of at least a few of the worst potential zig zags now, and you should, because the cost of not doing so is very high.
Principle #12 – Treat everyone in your life as you wish you would be treated.
How is this a financial rule? It’s a financial rule because a good personal and professional network has a tremendous positive impact on your financial life.
A good professional network constantly opens the doors to new opportunities and help when you need it. If you decide it’s time to move to a new challenge or get a better paying position, your professional network is probably how you’ll get your foot in the door. Treating your coworkers and others in your field as you would like to be treated is a good way of facilitating that. Ask yourself how you would like to be treated by other people in your field and by those you respect, and attempt to always treat others in that way while attempting to connect with as many people as you can in a meaningful way.
A good social network is similar, but it comes through in much different ways. Good friends come through for you when you want social experiences and companionship. They come through for you when your life hits a real challenge, often filling in many gaps that would otherwise have to be filled with money.
If you stick to a fundamental principle of treating others as you would like to be treated, you’ll find that it’s quite easy to build a strong professional network and a strong social network, and both will provide real benefits to your life as long as you keep sticking to that principle. Others will often follow your lead in how you act toward them, after all.
If you live by these twelve principles, you’ll find that your financial life will flow along quite smoothly. You’ll find yourself with low expenses, the money to handle unexpected expenses when they come along, and a nice safety net for the curveballs that life throws at you.