Trying to live by the rules can be challenging, especially when it comes to your finances. Do you save for retirement or buy your dream home? Choices are important and decisions are hard. When it comes to your finances, here are some of the important rules to follow.
Rule #1- Live within your means
Always start with understanding how much you make and how much you spend. If you are spending more than you earn, the difference is made up by taking on debt. Incurring debt on a regular basis, will cause you to go deeper into the hole each year without the any hope of getting out. You need to be responsible about your spending and make sure you spend within your means. Be careful of impulse buying. Buy when needed and not just because you want something.
Rule #2- Don’t be house poor
One large aspect of the American dream is to buy your own home. Real estate ownership and upkeep can be very expensive. Make sure you are buying thoughtfully. Can you afford the mortgage, interest, taxes, insurance and maintenance? Will you be putting all your money from your paycheck into your house? Make sure it is the right time in your life to buy and make sure you do not over spend. You don’t want to spend so much on your house that lifestyle is pinched.
Rule #3- Set up a budget and make a financial plan
Budgeting makes you fiscally responsible today and setting up a financial plan makes you financially responsible in your future. Set up a budget, monitor it on a regular basis and include savings for short term and long term goals. Build your financial plan based on your savings targets and make sure it all works together.
Rule #4- Diversification is key
As you invest for retirement, do not put all your eggs in one basket. Determine what the appropriate allocation is for your portfolio and spread your risk- stocks, bonds and cash. Buy indexed, low cost mutual funds to increase your diversification instead of buying individual stocks. Make sure your 401k is in a balanced allocation.
Rule #5- Do not pay too much attention to the market
The stock market is going to move up and down each day, week and month. Watching and worrying about the market will not help you. Put your investments in a well thought out and diversified plan and leave it. Investments are for the long-term, not for the day-to-day. Therefore, you should not be making decisions based on daily movements or as emotions rise and fall with the market.