Dave Ramsey once said: “personal finance is 20% head knowledge and 80% behaviour”. This means that understanding what to do financially is the first part of effective management of one's finances, then discipline and behavioural changes are the second and major parts to ensure healthy personal finances.
In order to guide you towards a healthy and successful financial future, we decided to dedicate our next two articles to the 10 commandments of personal finance. In this article, we will be discussing the first 5 commandments of personal finance which focus on the 20% head knowledge and include tips you need to know in order to effectively manage your money.
1. Thou Shalt Set Financial Goals
We all have our various financial wants – where we’d like to be financially or what we’d like to have at certain points in our lives. These various wants become financial goals when we set plans for how to achieve them, without these plans, they will simply be things we wish to someday have. Having concrete financial goals is necessary for designing the kind of future that you want. If you don't know specifically what your financial goals are for this year, next year or 10 years from now, we designed a printable worksheet to help you take the steps needed to create them. If you prefer to edit the worksheet electronically, we've got you covered. Click here for a Word version of the worksheet.
2. Thou Shalt Understand the Difference Between Wants and Needs
In economics, the definition of a “need” is something required to survive. Whereas, a “want” is something you desire to have, but not necessarily required for survival. In actuality, you only need four things to survive:
- Enough food and water to maintain your health
- Clothing (what you need to remain comfortable and appropriately dressed)
- A roof over your head
- Basic health care and hygiene products
As you can see, our needs can be simplified into: Food, clothing, shelter and health. Everything that goes beyond this — a big house, name-brand clothes, fancy food or the latest car — is a want. This doesn’t mean that you should only buy the things that you need; life is meant to be lived, not survived. However, it’s important that you understand the distinction between wants & needs and not confuse luxuries with necessities in order to manage your money effectively.
3. Thou Shalt Live on Less Than You Earn
Living on less than you earn is the first principle of personal finance; it is a fundamentally important part of money management because if you have this principle locked down, you are well on your way to living a comfortable financial life. Living on less than you earn has everything to do with control over your spending, which is not always easy, but is definitely attainable. If you struggle to gain control over your spending, we have an article right here that will help you set that right.
4. Thou Shalt Save
Having healthy savings is one of two ways that we can effectively plan for the kind of future that we want. It is important that we cultivate a habit of saving money because it firstly, helps us accumulate wealth for our future plans like buying a new house or car and secondly, it helps us plan for unexpected expenses or emergencies that may arise. Saving money may feel like a luxury sometimes but living life without adequate savings is putting your financial future at risk.
If you need help learning how to save, you can click here for our article on how to get a grip on your savings.
5. Thou Shalt Invest
Investing your money is a critical part for achieving Financial Freedom and it is the second way (other than saving) that we can effectively plan for the kind of future that we want. Investing your money in bonds, stocks, property or even a startup company that you believe in, could help you exponentially grow your wealth and ensure that your money is working on your behalf. If you don’t invest your money, that would simply mean that all your earnings would be a direct result of your labour and Financial Freedom (your investment earnings covering your expenses) would be impossible to achieve. You can click here for an article on what you need to know about investing so you can start taking proactive step to achieve Financial Freedom.
Well that’s it for now. The 5 commandments we’ve covered today encompass what you need to know to gain control of your personal finance. In our next article, we will be highlighting the next 5 commandments which cover the various ways that your behaviour will help you build the financial future that you want. To get access to Part 2, click here to subscribe to our newsletter.
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