Managing your finances can sometimes seem like a full-time job, with lots of decisions to make and things to learn. But, money management does not have to be complicated if you just step back and look at the big picture.
If you follow best practices for how you spend and save your money, your finances should essentially take care of themselves -- and you should be able to benefit from the financial security that comes with making smart money moves. What are best practices for money management? Just follow these four money rules and you'll be on the path to a worry-free financial life.
1. Pay yourself first
Many people intend to save, but simply never get around to it. In fact, one in six respondents to a 2017 survey said they simply hadn't had the time to set up a savings plan. Even if you have the best of intentions, unexpected expenses often come up throughout the week that empty your bank account. More than three-quarters of all workers in the U.S. live paycheck to paycheck, leaving little chance for savings.
If you pay yourself first, saving money will no longer be the last item on your to-do list that never gets done. Instead, money can be withdrawn directly from your paycheck and invested in a retirement account, as well as a savings account for essentials like an emergency fund. You'll never get a chance to spend the cash that you should be investing.
Most experts recommend spending only around 80% of your income and saving the rest in a combination of retirement and other savings accounts. While you may not be able to start at this level, it's important to start somewhere-- even with having 1% of your income auto-invested for you. Over time, you'll adjust to not having the money available, will adjust your spending accordingly, and can increase your savings. And, each time you get a raise, you can immediately invest a portion before you ever get used to living on the higher income.
2. Save for a rainy day
Emergencies happen. Cars break down, kids get sick, jobs get lost. Unfortunately, around half of all American households would struggle to come up with even $400 to cover unexpected expenses, according to a May 2016 report from the Federal Reserve. Common emergencies, like a job loss or a failed transmission, can cost much more than $400.
If a financial disaster happens and you're not prepared, the effects can reverberate throughout your life. A broken down car leads to missed work, causing a job loss or reduced income. A lost job leads to foreclosure or the repossession of your vehicle. Delayed medical care leads to a serious illness. A financial cushion protects you from the far-reaching damage unexpected expenses can cause -- and can keep you out of debt.
To save for a rainy day, start small. Put a few dollars a day into a high-yield savings account -- you can automate the transfer and pay yourself first or using savings apps like Acorns, which rounds up to the nearest dollar and saves the difference when you make a purchase. When you come into cash, like receiving a tax refund or bonus at work, put this money into your emergency fund too. Ultimately, your goal should be to build an emergency fund which can cover 6 months of living expenses -- and then to leave the money alone in case of a rainy day.
3. Live below your means
Paying yourself first and saving for a rainy day is possible only if you live below your means. The best way to do this is with a budget. A budget allows you to spend mindfully by determining where you want your money to go. You can cut unnecessary expenses and be smart about your spending by creating a budget. Be sure to include savings, and to leave yourself a little wiggle room you can use to cover unexpected expenses during the course of the month.
There are different kinds of budgets, including a zero-based budget where every dollar is given a specific job, as well as relaxed budgets where you simply try to keep expenses to a certain percentage of income. If you have trouble living by a budget, consider using an envelope system and physically dividing your cash into different envelopes for different categories of spending. When the cash in the envelope is gone, your spending on that category is done until the end of the month.
4. Never go into debt for depreciating assets
Finally, one of the keys to becoming rich is to avoid making bankers and credit card lenders rich. Some purchases, like buying a home or paying for a college education, are difficult to make if you don't go into debt. But, both student loans and mortgage debts are generally classified as "good" debt, because buying a home and getting an education can ultimately increase your net worth. Rising property values and enhanced career opportunities offset the cost of debt.
Other assets, however, don't go up in value-- so if you're borrowing to buy them, you take a double hit: interest plus depreciation. A car is one of the worst depreciating assets you can go into debt for, as it loses value very quickly and interest can be very costly. For any depreciating asset -- including your vehicle -- make it your goal to pay cash. If you cannot afford the item, delay the purchase or look for a cheaper alternative.
When you're spending less money on interest -- and aren't seeing your net worth decline each month because most of your assets are depreciating -- it is a lot easier to accomplish the other key goals, like living below your means and saving for a rainy day.