Most people know they should save for retirement, but few actually do. And even fewer understand the basics of financial planning.
In order to secure a bright future, it’s important to learn the 5 must-know personal finance rules for everyone.
1. Spend on assets over liabilities
When you are spending your money, spend more on assets than liabilities. This means that you should buy things that will help you make money, like a house or a car, instead of things that will cost you money, like a camera.
Why?
Because when you buy an asset, it will appreciate in value over time. This means that you will sell it for more money in the future or you can make money out of it.
On the other hand, when you buy liability, it will depreciate in value. This means that you will have to pay more money to keep it running.
For example, if you are buying a car from which you get little use of, it’s a liability because you are going to keep spending to maintain it and will never get the value for money spent.
2. Sleep on your impulse purchases
We’ve all been there–you see something that you want and you buy it without thinking. But before you make any impulse purchases, sleep on it. This means that you should wait 24 hours before buying anything.
Why?
Because when you wait to buy something, you will have time to think about whether or not you really need it. And more often than not, you realize you don’t need it after all.
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3. Invest for the long term
When you are investing your money, you should always invest for the long term. This means that you should not try to make quick profits by investing in things like penny stocks.
Why?
Because when you invest for the long term, you will be less likely to lose money. And even if you lose money, you will have time to make it back.
And the truth is, all investment options provide better returns in the long run including the stock market and mutual funds.
4. Have an emergency fund
An emergency fund is a savings account you should use to cover unexpected expenses, like medical bills or car repairs.
What is a good amount for an emergency fund?
Ideally, you should have enough money in your emergency fund to cover 3-6 months of living expenses. This includes things like your rent, food, and transportation.
5. Save for retirement
When you are young, it’s hard to think about saving for retirement. But the sooner you save, the better off you will be. This is one of the personal finance rules that people often fail to realize early in life.
Ideally, start saving for retirement in your 20s. But if you didn’t start then, it’s not too late to start now.
Calculations
This is how you calculate how much to save/invest for your retirement:
Take your current age and subtract it from the age you want to retire.
For example, if you are 30 years old and you want to retire at 60, then you have 30 years to save for retirement.
Next, calculate how much money you will need to have saved in order to live comfortably in retirement.
Say you want to have a retirement income of $50,000 per year, you will need to have saved $1.25 million by the time you retire.
And finally, calculate how much you need to save each year to reach your retirement goal.
For example, if you want to retire in 30 years, and you have $1.25 million saved, you will need to save $41,667 per year.
If you save early, you can save less each year and still reach your retirement goal. But if you wait until later in life to save, you will need to save more each year to make up for the lost time.
