Dave Ramsey often says that personal finance is 80% behavior and 20% head knowledge. Though I’m not sure where he got the number, I still know that behavior definitely has a heavier weight than head knowledge when it comes to money matters.
We often see many people, even educated individuals, who need more financial literacy. They have a lot of book smarts, but, unfortunately, they miss the application – including in the domain of personal finance.
When I started my personal finance journey, I didn’t know what I didn’t know. So, I started with the basic principles and worked my way up, which I also want to share with you.
Here are 14 personal finance rules I always try to live by:
1. Give back to God.
This is one of the most important personal finance rules that I live by. However, it proved to be a character-building experience, especially in personal finance.
I believe God is the source of everything and has blessed me with more than I need. So, giving back to Him in the form of tithing is something I always try to be faithful to, just as He did in my life.
Though some may argue that the 10% is too big of a portion of our budget pie, it is too small compared to how God has been with me throughout my life – in my ups and downs.
Even when I was unemployed, God always provided me with more than I needed, and I will always be grateful to Him.
2. Have a budget and stick to it.
Budgeting is telling your money where it should go because if you don’t, you will always wonder how it just disappears every month.
However, having a budget is only half of the equation if we want to be financially literate. The other half is to apply it.
There are several budgeting strategies you can try that are available on the Internet. However, these strategies are not perfect. You will still need to modify it to match your needs.
3. Live below your means.
Living within your means states that you should not spend more than you earn.
For example, if you’re earning P20,000, you should only spend up to that amount to avoid debt.
However, a personal finance rule that I follow is to live below my means, which means I will spend much less than what I earn to allocate more of that amount to other areas.
Another example is if I’m earning P20,000, I should only spend P15,000. The other P5,000 can be used elsewhere, like in savings and investing.
4. Be mindful of lifestyle inflation.
Lifestyle inflation is the sudden increase in our lifestyle concerning our growth in salary, which is sometimes called lifestyle creep because it creeps into your finances.
This commonly happens when we have an increase in salary after a job change or a promotion. When that happens, we may not notice that we are spending more than before.
Personally, I try to maintain a modest lifestyle and mindfully avoid unnecessary lifestyle changes that I don’t need. Though I still spend some on my wants.
5. Track your expenses.
Aside from having a budget and sticking to it, you also need to know where you’re spending your money. This is where tracking your expenses will be useful.
There are different ways to track your expenses, like using a money manager app, a spreadsheet, or the good old pen-and-paper.
This is especially important to people with limited income since tracking your expenses will reveal the areas of your income that you can change.
By tracking your expenses, you will never ask yourself where your money went since you can easily identify even the smallest expense on your tracker.
6. Buy life insurance that meets your need.
Life insurance is crucial for everyone, especially if you are the family’s main earner. However, it is still important for everyone to have a certain amount of life insurance under their name with the appointed beneficiary in case the inevitable comes.
But it is also crucial to find the right amount of insurance for your current need. For instance, a rule of thumb in deciding how much your life insurance should be is to compute all your financial obligations.
These may include your income replacement (crucial if you’re the main earner or breadwinner), mortgage, your children’s educational plan, and other large debts.
You should talk to your friendly insurance agents. Just be careful who you want to talk to.
7. Save 20% of your income.
As a personal rule, I save at least 20% of my income. The percentage is not arbitrary since it is the rule of thumb number advised by many personal finance advocates.
This 20% of income can be allocated to different avenues, such as your emergency, retirement, or investment fund.
The goal is to build the habit of saving at least 20% of your income so that the power of compound interest will have its effect faster.
8. Build your emergency fund fast.
An emergency fund is, by standard practice, worth 3-6 months of your monthly expenses. It is also crucial for everyone because it will serve as a safety net in an emergency.
If you read my post about the hierarchy of a strong financial foundation, you will notice that an emergency fund is much more important than investing.
So, by building your emergency fund fast, you will open up your budget for investment and other lifestyle allocations.
9. Invest in dividend-paying investments.
Once you have completed a considerable amount in your emergency fund, you can proceed with investing.
There are a lot of investment vehicles that you can use in your financial journey, but I choose dividend investing.
Though I still trade now and then, dividend investing is my main strategy since being paid with dividends is a form of passive income.
I am earning dividends through my dividend stock portfolio and PAG-IBIG Savings.
They say you should never put all your eggs in one basket because if the basket falls, you will break everything inside.
As a personal rule, I don’t place everything I invest solely on the stock market or other high-risk investments. I also put some on lower-risk investments, like digital banks and money-market funds.
We should only place a percentage of our money in equities (like stocks). The older we get, the lower our risk should be.
As a rule of thumb for the percentage of stocks you should own, the common formula is 100 minus your age.
So, if I’m currently 32, my equities should only be around 68%. Then the other percentages should be distributed to lower-risk assets.
However, there are also proponents of changing this rule to 120 or 110 minus your age since people are only living longer.
11. Avoid getting into debt as much as possible.
The debate between “good debts and bad debts” versus “there are no good or bad debts, only debts” has been around for quite some time, but I avoid debts as much as possible.
For me, avoiding debt is like avoiding prison because if you’re in debt, you are always looking over your shoulders, anxious about when your debtor will come to collect.
It is even worse for people trapped in a cycle of consumer debt because it is more likely a behavioral problem than just a money problem.
So, if you can avoid getting into debt, avoid it like the plague, especially if it will be consumer debt.
12. Be cautious with lending and being a co-maker.
Another important skill to learn early on is to be cautious when lending money. Often, a person’s desire to help is taken advantage of by some people, even by friends and family members.
So, if someone asks for monetary help beyond my capacity, I say that I can’t help that way, but I still try to offer other solutions.
However, I will refuse to be a co-maker or guarantor because you are putting yourself at unnecessary risk without any benefits.
I know some people who were forced to pay someone else’s debt because the original debtor left the town and stopped paying. Just imagine the stress it caused, which would have never happened in the first place.
Remember that unpaid debts damage many relationships. So, it is important to understand that when we’re lending money, we also lend them our trust.
I already wrote a post regarding considerations when lending money here.
13. Only use your credit card if you can pay for your purchase.
Another important personal finance rule that I follow is to be careful with credit cards since our digital world has almost made it convenient to ship online using credit cards.
Though some personal finance advocates teach us never to own a credit card, it is more convenient to dispute transactions with a credit card over a debit card.
However, it is important to understand that having a credit card is both a privilege and a responsibility. Many people fall into financial ruin because of it.
Personally, I have another set of rules when using credit cards. But basically, I just buy things using a credit card when I have the money to pay for them.
14. Extend your blessings to others.
Finally, it is important to be an agent of change in whatever we do. We can always extend our blessings to someone in need.
Many of us are blessed beyond our needs and are in the best place to reach out to others. So, instead of using the money we receive to spoil ourselves, we could help people who are desperate for their daily needs.
We can help by personally sharing our blessings (minus the photo and video ops) or through various non-government organizations, depending on which causes are closest to our hearts.
These are the things that I learned and developed through the years, and still working toward them. I am still miles away from where I want to be, but every step forward I take is a win.
Like I always say, personal finance is personal. What works for me may not work for you. However, use these tips as a guide and work from there.
Then as we progress and our circumstances change, we will need to recalibrate a little to accommodate the changes in our lives.
May God bless us in our endeavors.
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