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The Money 101

Personal finance basics to build wealth

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First Rule of Personal Finance

March 18, 2015

Financial Freedom in a Simple Rule

If you were only to ever take one piece of financial advice in your life, this first rule of personal finance should be it. In fact if you could only ever remember one thing about money, forget everything else and commit this to memory:

Live on less than you earn.

So basic, so pithy. And yet it is powerful enough to completely change your financial future. Not following the advice in this simple rule of personal finance can lead to living paycheck to paycheck, getting deeper and deeper into debt, always being one step behind and never saving for the future. 

So now the real question is how do you live on less than you earn?

The rule can be broken down further into two different portions that give us the explanation on how to implement:

  • Live on less
  • Earn more

Live on Less

You have to know what your money is being spent on. Without knowing where your hard earned income is going, you have no way of knowing what you can do to reign it in and bring it below you monthly income. Unconsciously spending your money in this way means it is gone before you know it and you no longer have money to set aside for the future. So the first step is tracking your expenses.

After you begin tracking where your money is ending up each month, you will begin to see patterns and recognize areas you may be able to cut back or remove altogether. There are certainly some fixed costs that cannot be avoided like housing  and debt payments. And some costs that cannot be avoided but can vary from month to month like food. It usually helps to break things out into needs vs wants. Ask yourself whether the item in question is an absolute essential or if it is a want that can be foregone or pared back.

Once you have tracked your expenses and compared necessities to luxuries, you can start to cut back on those things that you can do without. Or you can find other creative ways to be frugal like using coupons, shopping around for certain purchases or getting in touch with your do-it-yourself side. The main goal here is to give yourself a little room in your finances to begin saving money.

Earn More

Find different ways to increase your monthly income. This can range from asking for a raise at work to looking for a new position to starting your own website to doing odd jobs on the side. Whatever works for your situation is what you should pursue. Even starting off small and getting just a few extra bucks a month will help. As you continue to keep an eye out for new income opportunities there are bound to be some that fit your schedule and abilities.

That being said, you do not want to devote all of your time, resources and efforts to earning more. There is much more to life than this and many other activities should fill your days. At the end of your life you do not want to look back and only see an endless string of trying to earn more and more money. Just get yourself to a point where you are living comfortably and saving for your future, then you can stop worrying about your finances and enjoy life to the fullest.

Rinse, Wash, Repeat

Living on less than you earn will help to put your personal finances on track for success. Do this by spending less and finding ways to increase your income. This will give you the ability to save, pay off debts and take on those unanticipated expenses without any problem.

Repeat this cycle of evaluating your expenses and examining your income on a regular basis. It will bring financial freedom, you can count on it.

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