In our last article, we covered the first 5 commandments of personal finance, which focused on the things that you need to know to effectively manage your money. In this article, we will be outlining the next 5 commandments of personal finance which encapsulate the behavioural aspect of money management and highlight how your attitude can help you get the best out of your finances.
6. Thou Shalt Pay Yourself First
The ‘pay yourself first’ principle refers to the concept of taking care of your future self before anything or anyone else. As we highlighted in our last article, we take care of our future selves by either saving or investing our money. You pay yourself first by saving and/or investing your money as soon as you earn your income; this way you will be taking care of your future concerns first and making due with the rest. It is also vitally important to automate this process, to ensure that it is a seamlessly effective process.
If you aren’t already doing so, set up automatic monthly withdrawals from your checking account to your savings and/or investment account, to be sent as soon as your paycheck enters your checking account. That way, your requirements are met automatically each and every month, and whatever is left over is yours to spend however you see fit.
7. Thou Shalt Have Passive Income
Passive income is the money you earn from a project or investment which does not require your continuous involvement to be maintained. Why passive income is so important is because it is a great avenue to increase your earning potential without continuous effort from you. Passive income takes different forms such as sale of books you wrote, rent from a house you own or income from a passion project you started. It all depends on the resources you have within your reach.
To start thinking of a possible source of passive income, ask yourself this question - What can I invest time or money in that can potentially make me money while I sleep. You can also click here for a comprehensive list of passive income opportunities that may appeal to you.
8. Thou Shalt Be Proactive About Your Finances
We can either be reactive with our money or proactive with our money. A reactive approach to finances is one in which your money necessities drive you. Rather than planning ahead, you are always reacting - you are reacting to bills that need paying, reacting to that good deal you just saw or reacting to financial emergencies that crop up. A reactive approach to money is one of the main reasons that so many people live paycheck to paycheck
It’s important that you get proactive with your money instead, and this simply requires a change of mindset. Rather than sitting around and waiting for circumstances to force you into making financial decisions, you need to take action and plan ahead. Taking action means sticking to a budget that will allow you dictate your money and not that other way around, it also means saving up and working towards an emergency fund (saving up six months' worth of expenses), even if you think you’re not at risk of having an emergency.
Remember - you can’t wait for your financial situation to dictate what happens next in your life if you want to achieve Financial Freedom.
9. Thou Shalt Be Wary Of Costly Relationships
The company we keep and the way we relate with others has a stronger impact on our finances than most people realise. Some friends (and family) could help you stay on top of your finances, while others could bleed you dry if you let them. Our research team analysed the kinds of relationships to watch out for and these are the top ones on our list:
- People that borrow money with no intention of paying it back
- People that want to go out more often than you are comfortable with
- People that mooch of you because they think you can afford it.
- People that offer awful financial advice based on greed or ignorance.
Dealing with these people simply comes down to knowing where to draw the line, between them and your finances. In the coming weeks, we will be posting an article that expands on these various types of people, and provides practical steps to stop them from leading your finances astray.
10. Thou Shalt Give To A Worthy Cause Or The Less Privileged
Giving to a good cause helps you place more value over your money and treat it more carefully. Making regular donations can motivate you to be more attentive to your own finances in an effort to ensure you don't default on donations. Anything that gets you to pay closer attention to your bank account is a good thing—especially when it helps those in need.
There's also the psychological effect of acknowledging that there are those who are worse off than you, and there are more important things than material wealth. In fact, studies have shown that those who give regular donations enjoy activated pleasure centres in the brain - donating to the less fortunate generally makes you feel better and contributes to your long term health.
This brings us to the end of our series on the 10 Commandments of Personal Finance. Over the course of this series, we have covered the things you need to know and the things you need to do to have a healthy and successful financial future. If you enjoyed or learned anything from this post, please like it, share it and leave a comment! For more DailyKobo advice, click here to subscribe to our newsletter and don't be afraid to get in touch.