The 3 Simple Rules of Personal Finance

Personal Finance seems to be one of those subjects where there is as much nonsense written as good advice. There is a thin line between giving financial direction and promoting the next get rich quick scheme. You’ll hear about this 10 point plan or these 7 habits but if you want to get right to the heart of it, there are only 3 rules you need to follow in order to make sure you finish rich. Granted these three rules will not make you into Donald Trump over night but living by them will ensure you are ahead of 80% of the population.

1. Spend less than you earn.

If your money is running out long before your next pay is due at the end of the month then you have a problem. You need to start recording what you are spending and then cutback. Everyone has some slack in their monthly expenses – we loosely term it “the Latte Factor”. Find these indulgences and cut them out. You don’t need to go in with a scythe and switch back to the Stone Age lifestyle. You only need to make sure that you live within your means. If you are clearing £1000 a month then doesn’t drive a Jag – stick to an old Corsa! Charles Dickens put it best in David Copperfield, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

2. Put 10% of everything you make into the bank

The Steady Drip will always fill the bucket. Many a mickle maks a muckle. However you want to put it, everyone knows that small amounts soon add up over time. The best way of describing why you should place 10% of your salary into a savings fund was written down many years ago in the book “The Richest Man in Babylon” by George S Clason: “Now I will tell a strange truth, the reason for which I know not. When I ceased to pay out more than nine tenths of my earnings, I managed to get along just as well. I was not shorter than before. Also, ere long, did coins come to me more easily than before. Surely it is a law of the Gods that unto him that keepeth and spendeth not a certain part of all his earnings, shall gold come more easily. Likewise, him whose purse is empty does gold avoid. Which desireth thou the most? Is it the gratification of thy desires each day, a jewel, a bit of finery, better raiment, more food; things quickly gone and forgotten? Or is it substantial belongings, gold, lands, herds, merchandise, income-bringing investments? The coins thou takest from thy purse bring the first. The coins thou leavest within it will bring the latter.”

3. Don’t miss payments

By missing payments you do not only leave yourself open to missed payment fees but you will also ruin your credit record. Just one missed payment leaves a blot on your record that can take a long, long time to come off.

Having missed payments on your credit record means that you are less likely to get the best rates that banks have available. Your mortgage will suddenly be £600 a month instead of £550 a month. Your car loan will be £109 instead of £92. This might not mean a lot over a single month but when you multiply these extra costs over a 3year or 25year period then you suddenly begin to see how much you can get punished for a really small error. Jealously guard your credit report to ensure this doesn’t happen to you.

By following these simple rules you’ll never know the feeling of the bank charging you £30 for going over your overdraft limit; you’ll never go to take money from the bank only to be told you have insufficient funds; you’ll never be repossessed; you’ll never have endless sleepless nights worrying about money; you’ll be able to buy the items you desire with cash rather than having to take out expensive credit agreements.