Let’s face it, times are hard for a lot of people right now. What do you do after everything has gone to financial hell? A wake up call is happening as people realize yesterday’s spending habits didn’t prepare us for today’s challenges and that we need to make big changes going forward. It’s time to put aside the hyper-consumptive, no save mentality of yesterday for the financial practices of the wise in order to rebuild. And yes, you can rebuild!
Here are 5 money lessons to put into place starting today so that you thrive no matter the circumstances.
#1 – Learn About Money When You Don’t Have Any, Not After
Those who say they don’t need to study personal finance because they’re poor or that they’re waiting until they make bigger paychecks or have extra in the bank are missing the point. That’s like a soldier saying they’ll learn how to fire a gun during battle after someone’s already shooting at them or they’ve been hit. Getting financially literate is the most important thing you can do at any point in your life – especially when you don’t have money!
The best use of our resources when there’s little or no money coming in is studying how to best use what we get, whether that income returns to its previous levels or remains low for the long haul. That saves us from making mistakes that will waste our money, prepares us for inevitable emergencies, and sees that we live in financial security through rough times.
Wise money principles have existed since the invention of money. Those principles are roadmaps out of financial hell and prevent most pitfalls. They teach how to prioritize and allocate any level of income stream. Understanding and putting into place basic money principles keeps you from drowning in debt or living paycheck to pay check. It also takes you from just treading water to swimming around with ease.
I’m speaking from experience. What started me on the path to financial independence and semi-retirement at 38 when I was six figures in debt and completely demoralized about ever getting free was my first basic finance book, The Idiot’s Guide to Personal Finance in Your 20s and 30s. That booked educated me more than all my years in school, undergrad and law school. Information like what it espoused is easy to find. Rarer is the person with the wisdom to take the principles to heart.
All it takes is putting basic financial principles into practice to change your life for the better. Doing the same thing as before and expecting different results won’t work. Today’s economic implosion requires wisdom more than ever when it comes to how we use our money. Start reading about basic personal finance and money management – and put those suggestions into practice.
#2 – Set Good Priorities
Budgeting is just another word for identifying the right priorities in life and making a plan for them. That’s how we design monthly budgets – either to the betterment of our bottom line or to the detriment. Many of us used to prioritize trips, going out to eat, clothes, tech toys, cars, appliances, etc ahead of our basic living needs and necessities – including planning for inevitable emergencies and retirement. That was prioritizing disaster and financial hardship with a short helping of fun before the crash.
Now it’s time to prioritize the fundamentals.
Whenever we receive money, we should first prioritize the necessary – paying for food, electricity, rent, making the car payment, and setting aside money for the future when we might not have any source of income. THEN we put some of the leftover money toward fun activities and nonessential spending.
Most of us know this principle in theory. In practice we ignore it or don’t know the right amounts when it comes to setting aside for retirement and emergencies like unemployment or repairs for a broken down car. My personal formula is living on 70% of income and investing the remaining 30%, even if that means putting it into a money market account that earns 2% interest. It’s called the 70/30 Rule and it’s a wonderful rule that keeps egregious spending in check while still allowing the fun in life we all deserve – but in proportion to what we can handle without winding up stressed about bills, going bankrupt, or putting ourselves on the streets when times are bad.
#3 – Emergency Fund
Speaking of bad times, the current skyrocketing unemployment rate and economic chaos is bringing home the importance of having 3 to 6 months of income put away for hard times. Is it easy to do this? No, not if you never try or only put down a token $20 bucks every once in a while or withdraw the saved money when you want a vacation or new iPhone. If you deposit money each paycheck and let it accumulate, you get there sooner than you realize. If you follow the 70/30 Rule, you get there in a year.
This is make or break stuff and it’s very real. Prioritize emergency funds and manage your money to always have some for when the rainy days come. Because they always come. Companies fire people or shut their doors. People get sick or hurt and can’t work. Wars and economic recessions are inevitable. And we all age every moment. Retirement comes sooner than we think. The wise prepare for all these inevitabilities.
Start an emergency fund. Prioritize it right behind food and shelter. It comes before pizza and beer, buying new shoes or even ordering that overpriced but tasty Starbucks latte. They aren’t necessities. Your financial health is.
#4 – Minimize Debt
We are a nation of debtors. That needs to stop. It’s not fun to settle on a reliable car with good gas mileage over the nicer one that costs more to run, repair, and insure. It’s painful to turn down a more prestigious university for the one you might actually be able to afford. Looking at the smaller house and not using all the pre-approved loan money for a larger one can be excruciating. Then there are the daily temptations of clothes, dining out, entertainment, and so on. If you have to put anything on a card in order to afford it, you probably don’t need it and shouldn’t buy it.
These seem like hard financial constraints but they are financial basics. They only feel constraining because we’ve told ourselves we can and should have everything we want. Unfortunately the world just doesn’t work that way. I wish it did.
Digging a financial hole too large to get out of is digging your financial grave. Stay away from debt, even supposed “good debt”. That’s not to say never have loans but in general, keep all debt payments to less than 20% of your net income. Match your debt to what it’s actually providing you. If you’re not saving money or earning a lot more because of it, it’s bad debt no matter the marketing.
#5 – Self-Reliance
If this economic disaster revolving around covid-19 has taught us anything, it is that governments will typically bail out their elite friends and family in the banking and corporate world while throwing pennies to the masses who are the real citizens. The elite will do only enough to keep us from revolting and storming their estates while they survive the new economic depression in style. This is generally the way of the world from the dawn of time. The elite – and that also includes high level government leaders – look after their own interests and not yours. You must always look out for your economic health and not depend on anyone else. Today’s times is a call to self-reliance.
Politicians are owned by banks and corporations. They will bail them out immediately and hem and haw over giving you so much as a dollar. Welfare usually comes but at a pittance and usually after you’re completely ruined. Don’t think to depend on others though. Your parents may lose their jobs, have unexpected medical problems or go broke to leave you nothing or not have the resources to support you. Friends often have their own needs and families to support. Your company is not interested in helping you if it hurts their overhead. Companies, including yours, hand out more pink slips than raises. With divorce rates hovering around 50%, it’s a coin toss as to whether you can even count on your spouse in the long run. It therefore falls squarely on your shoulders to make sure your money needs are met. Any helping hands are great but don’t bank on them.
Being self-reliant in handling your finances and taking charge of them is the hallmark of financial security. Don’t leave it to others because they don’t have the same stake in your future that you do.
We live in chaotic times but this is not the first disaster to hit the world and it won’t be the last. Recessions and depressions come and go like the ebb and flow of the tide. Pandemics hit. Wars happen. Natural disasters strike. Good times come again and the economy booms. Innovators and entrepreneurs bring ideas that change the fabric of society. Through all this, sound money principles can help you live in financial security no matter the circumstances short of a true apocalypse.
Study personal finance and money management. Learn how to prioritize the essential over the nice to have. Build an emergency fund instead of buying that latte or six pack, avoid debt, and be self-reliant in managing your financial affairs. These are the fundamentals of the wise use of money. The will serve you well. Don’t wait till the crisis is over to understand and use them. Now, when things are broken, is the time to affirm their worth.
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This is something I am working towards as well.