I recently had a friend ask me what the three most important pieces of advice you could give someone about their finances. This really made me think, “If I could only provide three pieces of advice, what would they be? What is the most impactful information I could pass on?”
First, let’s define good financial health being that you have the means to achieve all of your goals (whatever they may be). So how can you reach your goals consistently over the course of your lifetime?
Here are the three unbreakable rules everyone should follow to set themselves up for financial success:
Live Within Your Means
It might seem like stating the obvious, but living within your means is so fundamental to financial success that it can't be repeated often enough. In fact, never mind something as lofty as financial success-- common sense tells us that if we spend more than we make, our overall net worth will drop (see related net worth statement blog post).
But what exactly are we trying to say when we insist you that live within your means? Simply put, living within your means entails having enough left over each month to invest, save, and contribute to your goals. Ideally, you should save and invest 20 percent of your net income. Seems high? Being committed to your future financial success means you have the discipline and willingness to put your money to work for you.
REMEMBER: Time is your greatest asset to growing your wealth if you start early, because of the compound interest your money earns when you are a consistent saver over a long period of time. Also, if it was easy everyone would be financially successful.
So now we know what it means to live within in your means, how do we do it? Check out this post to learn how truly successful people prioritize their finances.
Keep it Simple
No matter what area of your financial life we are talking about, the simpler the better. How do we keep it simple?
For example, when it comes to cash management you can:
• reduce the number of checking, savings, and investing accounts you have
• automate as much of your bill paying as you can
• automate your savings and investing so money comes directly out of your paycheck or checking account into your savings account every time you are paid
• don’t carry your credit cards with you; then you won’t be tempted to use them
On the investing side, if you don’t understand an investment and someone can’t explain it to you in a few minutes, walk away. Financial services is one area in life where complexity does not mean “better.”
Don’t Chase the Next Big Thing (and Be Patient)
The third unbreakable rule has two parts:
1. Don't chase the next big thing (see my post on Bitcoin). You don’t need to hit a home run to grow wealth, you do need the average market returns and you also can’t afford to strike out. No matter how tempting it becomes to invest in a suddenly flourishing sector, you must keep your portfolio diverse at all costs.
2. Be patient. Don't succumb to the whims of the market when things get volatile, because they will. If you are invested properly (in line with your risk tolerance and goals) you shouldn’t have to make any drastic changes.
While it's true that every investor is different, there are some rules that the most successful ones always follow. Some people say that investing is little more than a refined form of gambling, but this is only true in an extremely limited sense. Yes, investing does involve risk and a small amount of what some might call 'chance,' but anyone in the investment game for the long haul must understand that success and failure depend upon your habits and behaviors. Following these three unbreakable rules will help you improve both and achieve financial success!