This post is written by our regular contributor, Mike.
It’s said rules are made to be broken.
But then that’s probably not the wisest advice when it comes to your money.
While by no means an exhaustive list, these rules will help you establish good habits for managing your money. It’s ultimately your habits which will begin allowing you to create wealth.
These seven rules are intended for Millennials or anyone looking for a refresher on some basic principles of money management.
1) Create a Budget
The importance of a budget is knowing where your money is going. If your goal is to create wealth then you need to keep track of your spending, because if you don’t know where your money is going then it’s unlikely it’s going where you want it to.
A budget is also about learning discipline. That’s not to say you can’t spend money, it just should be within your budget when you do. Anyone can spend money, but it takes determination to create a budget and stick to it.
To get started, try creating a spreadsheet in Excel or Google Documents or an online one like Mint. Make sure to track all of your spending and all your income on one sheet or app so you can clearly see where your money is going.
Set weekly and monthly goals for yourself, stick to them, and then reward yourself when you complete them.
2) Always Sleep on a Big Purchase
It sounds old-fashioned, like something your Grandma would say, but this rule is still as sound as it ever was. Before making a large purchase, like a house or a car, you should always take at least one night to sleep on it before buying.
By giving yourself one night to think it over, it allows you to separate your emotions from the decision and makes it far more likely that you won’t make a choice you later regret.
Salesmen and women know this fact too.
When you walk onto a car lot or are being shown around a house, your saleswoman knows if she doesn’t sell that item to you the same day, her chances of selling to you at all decrease dramatically. She will do whatever she can to get you to sign the dotted line before you leave.
If you wake up the next day and still feel the same way about the house or car, then go buy it with the peace of mind that you’re far more likely to be making a good decision.
Being impulsive feels good in the moment, but it’s a poor way to handle your money and not something Millennials should buy into.
3) Your Spending Reflects who you are
If you’re having trouble sticking to your budget then try taking a look at the underlying issues. It’s a common idea that where you spend your money reflects who you are. If who you are and what your budget can afford don’t line up, then maybe it’s time to look at how spending money makes you feel.
If you’re spending too much money on clothes because you need to feel trendy, then try thrift shopping and create an identity around second-hand style. If you’re eating out too much because you like good food, try your hand at cooking and create an identity around being a great cook.
The habits that reinforce how we view ourselves can be real problems and often reflect clearly in the ways we spend our money. If you want to get serious about saving money and living within your means, then addressing the underlying issues of how spending money makes you feel can be a powerful tool in helping to alter your spending habits.
4) Prioritize Paying your Debts
Make paying off your debts a top priority. Do whatever you have to do to make your payments on time and pay them off as quickly as you can. It might take working two jobs, moving in with friends or family for a while, or simply budgeting a little tighter, but paying off your loans should be a top priority for anyone in debt.
The problem with debt is that it can quickly get out of control if you don’t stay on top of it. The interest that you pay in the long run can sometimes equal or exceed the price of the item. It’s money that could be going into the bank or towards a vacation that instead is going towards paying off interest.
If you’re a student finishing college, then have a plan in place to start paying your loans. If you’re fortunate enough to have a six months grace period after graduation, be sure to take full advantage of this time to make all the money you can before you start paying interest.
It seems obvious but it’s worth saying: you should start by prioritizing the debts that have the highest rates of interest and pay them first. Those are the ones that will cost you the most if you don’t pay them off quickly. Consider looking into refinancing your debt at a lower rate as well.
No it’s not cool to have to move back in with your parents or fun to work long hours, but if that’s what is necessary to make payments on your loans, then perhaps that’s what you need to do. It’s far cooler in the long run to have financial freedom than it is to be stuck paying off loans twenty and thirty years after you took them out.
5) Invest Now
I’ve heard it said that poor people work hard for their money and rich people let their money work hard for them. That’s what investing is – letting the money you’ve earned work for you.
Most Millennials still remember the 2008 stock market crash and the stories of those who lost a lot of money. Maybe you were one of them or know someone who was – I can definitely relate to that. It made many of us wary of investing.
However now is a great time in your life to start investing again: interest compensates for the value of time, so the younger you are when you start investing the more benefit you will gain from interest. Conversely, the later you wait to start investing, the less you will gain.
There is an element of risk in the stock market and there is also a minimum amount of money you have to be able to put into your investment in order to make it profitable, but investing your money is still a good rule to follow and a great way to increase your wealth by letting your money do the work. Consider checking out low-cost investing options like Motif Investing.
6) Have an Emergency Fund
Within your budget you should make room for an emergency fund. You never want to have to borrow money because your car died unexpectedly or your fridge quit working.
Some experts recommend saving up six months worth of wages so that if you lose your job you still have plenty of time to recover and find a new one. If it’s just not within your budget right now to have six months worth of savings, try putting aside just one or two thousand dollars for an emergency fund.
Unexpected things happen and the thing about them is that you never expect them to happen to you. Prepare for the worst but hope for the best and you’ll probably be just fine.
7) Give to Something you Believe in
It’s no secret that money doesn’t buy happiness, but there are studies that suggest giving just might. It’s true, happiness is a problematic thing to try to measure and the results can always be disputed, but the personal value of charity is an old idea and one backed by modern studies as well.
If you’re trying to accumulate wealth, then giving money away seems like the last thing you’d want to do. However even some of the wealthiest and most successful men and women on the planet practice giving. From Bill Gates and Mark Zuckerberg to Angelina Jolie, there are plenty of examples of how success, wealth, and charity are all intertwined.
Ultimately, comparison is the death of happiness. When we compare ourselves to those who have more we’re always going to end up dissatisfied. Giving can be a great reminder of how much we do have, rather than how much we might wish we had.
Creating wealth is a good aspiration, but it shouldn’t be so important that we can’t spare some of what we have to help others less fortunate.
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A lot of these rules have been solid advice for generations. Today we may track our money with spread sheets and apps instead of pencil and paper, but the basic principles of good money management are much the same for millennials as they always have been.
What rules do you have for your money? Is there a rule on the list that was made to be broken?
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Great tips! This year I’m working on beefing up my emergency fund and having a budget really helps keep my spending in line so I can meet that goal.
Given their levels of student loan debt, I’d say the biggest thing is to not wait until it’s gone before things like investing, even a monthly $100 into a retirement account, etc. Assuming you can do more than just cover your basic payment, anway.
To expand on rule #3, don’t buy something just because “all of your friends” have it. I put that in quotes because it’s often the case that a person sees 2 or 3 other friends have something and then all of a sudden, it’s EVERYONE has it.
Thanks for the tips.
What I find most useful for myself is closely watching my cash flow, so I know exactly where my money went and how much I earn. I’m using Personal Capital but Mint as you mentioned is probably another great tool. In terms of budgeting, don’t just budget for your spending every month, but also budget for the entire year – that puts all the goals into a more defined plan.
As a millennial, I agree with all of these rules. I prioritize saving over budgeting though. As long as I am hitting my savings goals for the month, I am less concerned about how I budget the rest of my money. That’s one thing I should work on.
Such great rules! The “sleep on it” one is tried and true!
I like idea #7 about giving to causes you believe in. Something is better than nothing, and there are a lot of great organizations that only remain in existence due to donations. Who knows, maybe one day you might need assistance from one of these charities. Or maybe you want to give back as a way to say thanks for the work they have done in your life.
Hey, Mike!!
Those are my 7 Money Rules and I’m 56! Great minds think alike, hug? Of course, I had to learn those on my own before the Inter-Web came along.
Excellent article! Glad you’re spreading the word.
I’m gonna have to pass this on, for shore!!