7 Simple Rules for Financial Success

vemuda.com - Most of us are working towards financial security. That’s why we wake up every day, go to work and earn a decent living. And although it seems that reaching our financial goals is not as easy and we would like it to be, hopefully these simple rules will help you in your journey to financial success.

Source: unsplash.com by Tyler Franta

1. Get paid what you’re worth and spend less than you earn 

Do your research before accepting any job  position. Find out what that position is worth in the market, both within and without the company. Then, conduct an evaluation of your skill sets. Look at the tasks you might  be required to do, and with that asses your level of productivity, what contributions you  can give to the company and the going rate.  

All of this is necessary because getting paid  less than you’re supposed to, regardless of how small the difference in money is, will affect your finances significantly in the long run.

Now here’s a hard pill to swallow: you’ll never  get ahead if you keep spending more than you earn. While this principle may seem simple to understand, many find it hard to follow this rule.

But fear not! Even if it may seem impossible to stop spending money on take aways, shoes, clothes, etc., a good amount of dedication and the yearn to grow your bank account can help you retrain your mind and mend your frivolous spending habits.

It is far easier to get to financial freedom by spending well below your means than by trying to earn more money.

A good starting point is to make a note of your  needs and your wants. Needs are pretty obvious: food, decent clothing, and rent. If you think about it, almost everything else is a want.  

You might think you need that new appliance  that you’re seeing all over your social media… but you don’t. Do you really need to buy every new model of the iPhone? Do you really have to buy more shoes? Do you actually require the same car in two different colours?

Sorry to break it to you, but no you don’t; none of these are needs! As soon as you’re able to distinguish between your wants and needs, you’ll be able to have your finances under control.

You also need to understand what’s important to you in life. Differentiating between wants and needs is not enough, you also need to distinguish between the wants that bring you fulfilment and those which don’t. Spend more on the things that elevate your life and save the rest.

The amount of money you bring in will not  matter if you keep spending beyond your means. And this truly does test the strength of your willpower. If you’re determined to build your bank balance and subsequently reach finical freedom, you absolutely have to follow this rule.

2. Create a budget and stick to it

Having a budget is important because it allows  you to clearly see how much money is coming in and where all of it is going. Budgeting is a vital component if you want to gain financial security.  

It allows you to set financial  goals (like, say for example, how much you want to save each month) and it helps you figure out how to achieve them.

You can track your money in various ways. If you’re old-school, you can use the traditional method of using a pen and paper to track your spending. (Oh! And a calculator too if you’re a bit slow in the maths department like me)  

Or you can use apps and websites that are  created to automatically show you what your financial goals should be based on your current  financial situation. These methods can tell you the brutally honest truth as to how much you think you’re spending versus how much money you’re actually burning through.

So be warned, you may have to take a few deep breaths when you realise just how much you’re spending. On the bright side, once you’re over the shock, these tools can help you make small adjustments to your spending so you have more to save and invest.

Once you have a clear image of your finances, you can set goals that are important to you and work towards them. This could range from saving up for emergencies; buying your dream home; or travelling around the world. As you start to get the hang of budgeting and you manage your finances accordingly, you can sit back and watch your bank balance grow.

3. Pay off credit card debt

If you aren’t careful, credit card debt can  potentially hold you back financially. Not paying off the credit card debt in time could  cost you your dream of financial security (Yes. The pun was absolutely intended). 

Using credit  cards is convenient, but sometimes it is easy to forget that this is actual money being spent. This money will eventually have to be paid back by you.

Debt is viewed as a threat to financial security because it prevents you from making the most out of your money. The extra cash could be used elsewhere – somewhere the money could actually be useful.

For example, it could be used for your child’s college education, or it could contribute towards your retirement. The quicker you get yourself out of debt, the more it’ll help your finances: you will have more money to spend towards your finical freedom.

Along with your financial situation, debt also doesn’t help your health. It contributes to the heightening of your stress levels. When in debt, one always thinks about how to cover those payments as well as how to save  enough to simply live.

We all know the negative side effects of stress, especially on our mental health. What’s the point in spending money on those expensive skin treatments when the debt will just stress you out and cause more break outs?

Once all your debt is cleared, you’ll be able  to breathe and rest easy knowing you don’t own anyone anything. You’ll only have the usual monthly expenses to deal with, and I think we can all agree that worrying about those expenses is less intimidating than worrying about stress.

4. Work on a retirement plan

If it’s offered by your employers, consider contributing to a 401(K) plan, or any retirement program for that matter. The idea of a 401(K) is that your employer will contribute the same amount of money as you do (to a certain point) to your 401(K) account.  

This is known as ‘employer match’. Although  common, not all employers will offer a 401(K). In that case opt for any other retirement plan they have for you or consider investing in an IRA.

While a 401(K) is great for those employed, a Roth  IRA is a great account for younger people. It is backed by post-tax dollars. An IRA eliminates the immediate tax deduction and it saves you from having to pay a bigger income-bite when you withdraw the money upon retiring.  

Taking up a Roth IRA as early as possible could result in a bigger pay offer in the long run, even if the amount of money you  initially invested was relatively small.  

The longer the money is kept in the account,  the more tax-free interest you get. Cha-Ching! When it comes to planning for your retirement, the sooner you start the better it is. While everyone has different personalised goals about the amount they are aiming for, the ways of achieving it is more or less the same.

5. Have a savings plan

With all the financial obligations piled up, it is easy to forget about yourself. A useful rule of thumb is that you should always pay  yourself first. Paying all your bills first and then putting aside whatever is left into your  savings is a recipe for disaster. Why? Because it will lead to a smaller savings account because you’ll be left with a minimal amount to save.  

Before you even think about paying bills, set aside a certain percentage for yourself. You can even have this amount automatically  deducted and sent to a different account.

Preparing for the future is important but how on earth can you do that when there is no money for it? You need to invest in a retirement account for all long terms goals. You should also have regular investment goals to build wealth.

Start this practice even if you don’t have a lot to invest with – something is better than nothing. This way you’ll at least build the habit of investing so when your income does eventually grow, investing and saving will become second nature.

Make sure you have money set aside to pursue your passions. This, for example, could be starting a business. You should have a cash reserved for your passion so that you can take calculated risks and still feel at ease.

To own your own business, you will need a little financial backing for it to take off. Open a savings account and contribute to it on a monthly basis so that you can explore new opportunities to grow your mind, yourself and of course, your financial status.

Even if you don’t know what you’re saving for  or have a specific goal in mind, you should still save. The whole point of saving is to have reserved money if you, seemingly out of the blue, find something you’d like to do. Feel like  going on a Baltic cruise all of a sudden Well hey! You’ve got the money for it  because you thought ahead and saved.

There is no denying the fact that life is full of unexpected surprises. At any given point, you could lose your job, face some natural disaster or get robbed! (ok that escalated quickly. I promise I’m not trying to scare you).  

You need to have money saved for any kind  of emergency. Not only are these emergencies physically and mentally draining, they can also empty out your pockets if you are not ready. Prepare for the worst by saving up money which will specifically be only used for emergencies.

We all need a sense of security to enjoy life. Financial security happens to be at the top of this list. If you don’t have money set aside, you’ll always be worried about not having a safety net if something unexpected were to happen.

6. Review your insurance

A lot of people fall prey to paying more than necessary for life insurance and disability insurance. This could range from adding coverages to car loans; buying whole-life insurance policies instead of term life policies (the latter is more sensible); or buying life insurance when you don’t even have any dependants.  

Insurance is only beneficial if the coverage  is enough to handle whatever losses you face. With regards to those of you with dependants, do a lot of research to ensure you pick the best life insurance for you and your loved ones.  

You want to make sure they will be  comfortable even in your absence. It’s safe to assume that during your long life, your lifestyle and personal needs are bound to change from time to time. With a change in  lifestyle, you’ll also have to change the kind of insurance you have.

You need to make sure you are constantly reviewing your insurance plans you have to ensure it fits with your current lifestyle. Whether it be buying a car, putting your child through school or an unexpected medical emergency, having the specific insurance is very beneficial.

7. Update your will

Research shows that only a small percentage of the population have a valid will. If you have dependants, it is extremely vital that you have a will.  

It does not matter how much you have to give; a will is a necessity. If it seems daunting to go into a lawyer’s office and have them draft your will, technology is your best friend. There are a number of software that draft it for you instead.

Once you have written your will, don’t forget about it. It’s easy to assume that your initial draft is good enough and that your future is secure.  

This is not the case. Just like the insurance plans which you always have to review with a changing lifestyle, the same principle applies to a will.  

Make sure you always add (or remove) things from your will as needed before it’s set in stone.

We all worry about our loved ones. We want to  make sure they have a safe and secure future. This is why a will is necessary. And more importantly, this is why you need to constantly update it.

Your will dictates who gets what, and while there is a process through which family members can argue that they haven’t been given enough, it’s time consuming and expensive. Protect your loved ones by having a valid will which you constantly review so that every person you love gets the protection they need.