I am going to answer this question slightly differently to how I might otherwise have answered it, had I not seen other's answers to this Q.
The reason is that many have said that they "would not go into debt" or "not spend money that they don't have" as a key financial rule. This is all well and good but I think it is vitally important to make the distinction between good debt and bad debt.
Yes, you read that right - there is such a thing as good debt.
Good debt is debt that is drawn down against an asset that has the ability to appreciate in value or provide cashflows that exceed the cost of servicing the debt i.e. the interest costs. Ideally both.
Common examples might include debt or a loan to acquire real estate or businesses.
In the case of real estate, it is only a 'true asset' if you are renting it out to secure cashflow to settle the interest payments whilst, hopefully, enjoying capital appreciation in value of the real estate during the loan period. At the end of the loan term, you should be able to sell the property for a value that exceeds the outstanding loan principal. You've made a gain on the purchase using the debt. A gain that you are unlikely to have been able to enjoy had you not used (good) debt. After all, how many of us can buy residential or commercial property out of our own pockets...?
And this is what "the rich" do. They use (good) debt as leverage to buy assets that give them positive cashflow during the holding period and then sell the asset for gains later. Meanwhile, everyday folk are warned to stay away from debt. And so get stuck with minimal assets and net worth. This is due to poor financial education.
Bad debt is the experience that most folk have of debt and this is why they steer clear. Bad debt is debt taken out to buy:
It can be either or potentially all three of these factors that can make the use of debt become bad debt.
Common examples include loans for cars, holidays, shopping etc.
In each case, interest is payable on the loan every month with no cashflow income from the 'asset' purchased (unlike for good debt). This means that the interest expense has to be serviced out of wages or other income. This can be painful. Then at the end of the loan term, the 'asset' has little or no value so the borrower is in a worse financial position than when they started - bled of interest costs during the holding period with little to show for it at the end of the loan.
Rich people NEVER use debt to purchase consumables or assets that don't derive positive cashflow income. This is bad debt, yet this is the debt that most folk are aware of, hence the confusion.
Good debt allows you to accelerate growth (how long might it take you to save up the equivalent funds?), get leverage to free up your own cash for other uses and use other people's money to derive positive cashflow and potential gains - if used right.
And herein lies the key financial rule:
Consider using debt as a tool to accelerate your growth and to provide leverage as long as it is good debt (secured against true assets) and that you have run the numbers to make sure that it is a sound investment.
(This is not financial advice, yada yada)
I have a few financial rules i try to live by.
I'll provide two:
Three simple rules when it comes to money:
1. Never, ever get into debt - Seems to be quite normal and easy, but once you have got credit to apply for a loan, more likely people will apply for a loan to buy something they don't really need. The most popular case is the credit card.
2. Rely on one income - No matter how good your job is paying, you need a second income, to avoid any uncertainties to happen. Normally, a good formula of saving is try to have at least 25 times of your monthly expenses as a basic saving.
3. Opt to high-yield investment - One of the basic points of investment is, it always comes with a degree of risk. Higher the risk, higher the rewards. Seeing ads about binary options that you can earn $1.980 easily is just a pure advertisement. You can earn it, but you will never beat the system.
Pay yourself first.
In the book The Wealthy Barber by Canadian David Chilton he offers some very sage advice. The book is told as a story of a barber who cuts hair, talks to his customers, is not an extravagant man but is in reality very wealthy. When asked how he did it he answered:
Pay yourself first. By this he meant take 10% of your income and put it in savings. Then with the remaining 90% of your income, live your life. Only buy the house you can afford with 90%, the car, the vacation, etc.
Never touch that 10%, that is to pay yourself with later (retirement).
I have been following this advice since the late 80's when the book first came out and it is the one rule I have never broken nor will I. 10% of everything I earn, whether it be fiat, crypto or any other form of monetary gain, 10% is always put away.
For anyone in their 20s looking to invest for their future I highly recommend this book and his followup books. They can change your life.
There are many areas that I would not break as my own financial rule.
Pay using credit cards - I have been a credit card owner for alot of my years when I started out working. It all started out when I had a house loan and the credit card was given for free which of course is a tactic to get you to one day spend it unreasonably. I accidentally bought a magazine subscription after somehow being conned by this man who walked into my office and told me about this good deal to subscribe feed for a three year deal to national geographic and a bunch of other title. It all slowly spiral out of control from there. I spent the rest of those years paying interest of my credit card.
It took me around ten years and my mom to get me off any credit card debt. She adviced me to cancel the credit card. Finally credit card freedom. So Nowadays I only buy things I can afford.
Buying on discount, I seldom buy things on full price especially when that item has just been released. Its going to be very expensive. Wait for that model to go for a year and it's going to be cheaper than what it is now.
Pay everything on time and calculate the budget as it is important to know if it's enough what we earn. I usually don't take money and enjoy first. I pay off debt then check if there is any for investment and I invest some.
If I can pick only one: never spend money you don't have.
Never go into debt. Live on less than what you make.
Debt is always at the expense of future earnings.
Don't invest anything you are not willing to lose. Rule 1 for me. Never break that.
My dad told me "the best way to get rid of someone is to laon them money". Never loan a friend money or most likely you may never see them again.
1. “You have to save 20 percent for a home down payment.”
If you’ve ever thought about buying a house, you’ve probably heard it: Don’t take out a mortgage until you’ve saved up at least 20 percent for a down payment. Otherwise, you’ll be forced to pay notorious private mortgage insurance.
Higher mortgage payments can be a pain, but the financial trade-off between paying more now versus waiting years to save up enough money could be worth it.
“If we look at the macroeconomic factors of the last couple decades, real estate has appreciated considerably while wage levels have largely stagnated,” explained Justin Chidester, owner of Wealth Mode Financial Planning in Logan, Utah. This, he said, makes it unrealistic for most people to save up a 20 percent down payment within a reasonable amount of time.
“My new rule of thumb is this: If you can save 20 percent down for your target home within about five years, go for it,” advised Chidester. “But if you take much longer than that, you’re going to be chasing a moving target with home prices going up, which also means you missed the opportunity to experience appreciation on something you own.”
2. “Credit cards should be used for emergencies only.”
As a young adult, if your parents talked to you about money at all, they probably warned you about the dangers of credit card debt. “For emergencies only” was usually the caveat that accompanied access to plastic.
Today, credit cards have become diverse and effective tools that allow you to “track your spending in one place, increase security and theft protection, and potentially gain cash-back rewards,” according to Eric Maldonado, owner of Aquila Wealthin San Luis Obispo, California. Often, it makes much more financial sense to do your spending with a credit card over cash.
But that doesn’t mean you should swipe with abandon.
“Make sure to set up a monthly automated payment from your checking account to pay off your credit card balance in full every month,” said Maldonado, “so as to never incur any interest charges.”
3. “Getting married requires merging your finances.”
Getting married means sharing just about everything with your spouse ― your home, your time and maybe even a family. But one thing you don’t have to share, contrary to popular belief, is your money.
“Getting married doesn’t mean you have to merge all your bank accounts,” explained Ryan Frailich, founder of Deliberate Finances in New Orleans. He said it’s much more common for marriage to happen later in life after couples have spent years building their financial lives independently.
“I see many couples have great success with a ‘yours, mine, ours’ system,” said Frailich. Each spouse has separate accounts but contributes a portion of income to a shared household account. “Having open conversations about your finances, spending and debt is vital … but you can do all that without putting all your money into shared accounts,” he said.
4. “Use your age to determine asset allocation.”
Tricia Rosen, the founder of Access Financial Planning, based out of the greater Boston area, said she used to work at a large mutual fund company during the 1980s and 1990s. Back then, it was standard to give the following asset allocation advice: “Subtract your age from the number 100 and that is the percentage of your portfolio that you should have invested in equities, with the remaining percentage in fixed income, adjusted each year as you age.”
Today, many investors still follow that rule of thumb. But according to Rosen, that advice is not only outdated ― it’s potentially harmful to your future earnings.
“Today, we have many more investment choices available to the average investor,” said Rosen. “We have a better appreciation of a person’s individual tolerance for risk and individual financial goals. A person’s ideal asset allocation is more unique to the individual person than was previously recognized,” she added.
So instead of following a strict approach to investing, consider talking to a professional about how you can tailor your portfolio to your personal risk tolerance and goals.
5. “Save 10 percent of your income.”
The 10 percent savings rule used to be the gold standard when saving for your golden years. Today, unfortunately, 10 percent of your income probably isn’t enough to retire on.
“While it’s a fine start and certainly better than nothing, it certainly shouldn’t be used to benchmark success,” said Michael Troxell, a senior wealth manager at USAA. “That number won’t be enough for 90 percent of individuals, especially with longer life expectancy and rising healthcare costs.”
The problem, he says, is that following the 10 percent rule ignores expenses. “It is the expenses that end up hurting retirements, not the savings rates during one’s working years,” said Troxell.
So rather than aiming for a specific percent, Troxell recommends saving as much as you can while still maintaining a good quality of life and focusing on cutting unnecessary expenses.
6. “Pay off your mortgage as fast as possible.”
For most people, a mortgage is the largest debt they’ll ever shoulder. So if the opportunity arises to pay off that debt early, shouldn’t you jump at the chance?
“At one time, when interest rates were double-digits and investment returns were an average of 8 percent, that made sense,” said Melissa Ellis, founder of Sapphire Wealth Planningin Kansas City, Missouri.
She explained that today, however, the majority of homeowners have a mortgage rate of less than 5 percent, while they can still expect to earn 8 percent or more annually on investments.
“It’s better to make your payments on time, take your mortgage interest deduction on your federal income taxes and have more [money] invested for higher returns,” said Ellis.
7. “You need a prestigious degree to get a good job.”
There was a time when in order to get a “good job,” you had to get a degree from a prestigious university. That’s what our parents said, anyway. And 20 or more years ago, they probably would have been right.
“The cost of college 20+ years ago was much lower compared to wages,” explained Mark Struthers, founder of Sona Financial. “Because wages have not kept pace, and the money had to come from somewhere, student loan debt has become the next big crisis.”
Today, if you spend too much money pursuing a degree, few jobs are good enough to warrant the cost. “If you buy the stock of a company... and pay too much for it, then the fact that’s it’s a good or even great company means little,” said Struthers. “The same holds true for college.”
Instead, students and their parents need to consider the return on investment when it comes to college. In other words, you should think twice about shelling out six figures for a private education in art history ― and maybe even consider vocational school over a traditional four-year degree.
8. “Renting is the same as throwing away money.”
Homeownership has long been a staple of the American dream. So when you send rent checks off to a landlord for years with nothing to show for it, you might feel like you’re failing at achieving an important goal.
On the contrary, renting affords you a life free from major expenses such as mortgage interest, property taxes, maintenance and more. Plus, it opens up opportunities to earn more money.
For instance, “paying rent means that you don’t have an expensive illiquid asset that would prevent you from taking a lucrative job offer in another market,” said Justin Harvey, the president and founder of Quantifi Planning in Philadelphia. “In cases like these, there is significant monetary value to being nimble with regards to your living arrangement,” he said.
Of course, Harvey noted this isn’t true for everyone, as it depends on your profession, location and more. But in general, young adults shouldn’t believe “that buying a house is the default option,” according to Harvey.
Money is deeply personal. So when it comes to your finances, you should take any one-size-fits-all recommendation with a grain of salt. There’s always an exception to the rule ― and you could be it.
Never spend what you haven't earned yet.
Avoid credit card/loan debts that make me end up worse off. The only 'debt' I have is to family and they haven't been bothered with it, they know I will pay it back in time and that it always helps me out when I need it and that I would do the same.
But credit card/loans from companies are something I won't do with the exception of if I had to pay for a course or something to help me get a job.
To not touch a credit card and pay for something you can't afford.
If you can't pay cash or pay for an item within the 30 days before credit card fees apply then I won't buy it. There are a few things that don't work and that is purchasing a house and a car.
Purchasing a house you are penalized because of interest rates and I always get ahead of the payments so it brings the interest down. Any other way and you are giving away hard earned money.
When I was younger I had a credit card and learned the hard way with interest rates and it is not worth it. A purchase can cost you double what you paid for it and that is why I have no credit anywhere what so ever.
This one is pretty easy, but it took me a long time to realize it. You should never lend money to family. I know this seems counter intuitive to what you think the roll of your family should be.
We are all raised to believe that a family should be a loving and supportive unit. I dont disagree with that assumption and in perfect world that is exactly as it should be.
The world isn't perfect though and having someone in your family owe you a debt or owing someone else in your family a financial debt can place a strain on the relationship.
When one party doesn't pay off the other party as quickly as they think they should it can create a large amount of distrust and animosity. It just isn't a great idea. Help them out any other way you can, but dont lend them money.
Only invest what I am able to lose without getting in trouble