There are three basic principles surrounding good personal finance habits, and they are:
* Live Within Your Means by Spending Less Than You Make
* Making the Money You Do Have Work More For You
* Anticipating and Preparing for the “Unexpected”
Living Within Your Means
Everyone talks about living within your means, which simply means that you spend less than you make, you avoid excessive debt and you save money. The concept is easy to understand, but judging by the number of people who spend more than they have – not so easy to apply!
Living within your means involves knowing where your money is going for the everyday spending – but it also applies to the big life purchases, like buying a house or renting, the decision to have (or not to have) children, deciding your location, and what kind of car to drive.
Making Your Money Work More For You
Making small changes can maximize your savings without having to modify your lifestyle much. For instance, if you have good financial discipline, it may make sense to use a rewards credit card for every purchase and payment during the month. Paying it back in full at the end of each month means you have a 30-day interest free loan every month, you earn more rewards from the credit card company, and it's easier to see where your money goes each month when you view your transaction records.
Upgrading your bank account to one with higher interest or no fees can make or save you a lot of money over time. Try to invest money in accounts that will give you the most interest for the length of time you're able to leave the money untouched in the savings and watch the magic of compounding interest. Get into the habit of paying yourself first, automatically – every single pay period.
Check over your existing bills carefully and look for ways to save money – typical expenses that people pay too much for include cable television, phone and cell phone service, and utility bills.
Anticipating and Preparing for the Unexpected
Many people claim not to have money to repair their vehicles when it breaks down because it was “unexpected”. When the furnace in the house dies and requires replacing or maintenance – people claim it was unexpected and therefore they don't have the money to take care of it.
While we may not know exactly when these events will occur- we know that these types of “unexpected” events DO occur, without fail. So they aren't really “unexpected”.
Anticipate and prepare for these events by setting up an emergency fund. This is an account that gives you a way to keep going and stay on your feet when disaster happens. If you can, set aside three months of living expenses, but if you aren't there yet- just keep putting aside as much as you can into your emergency fund until you reach that number.
It's important to recognize the emergency fund is separate from your savings account – it's not used for vacations and it's not used for investments. Your emergency fund is meant for all of those “I didn't know it was going to happen” type events that typically lead people to take out loans, use credit cards, or borrow from friends or family.
Save money for your emergency fund in an account that you can access as needed – but in one that will also earn interest to better maximize your money.