20 money rules for young adults to live by
Never carry a credit card balance.
The first rule of personal finance is to avoid credit card debt like the plague. Credit card borrowing rates are egregiously high and paying those rates is an easy way to negatively compound your net worth. Not all debt is necessarily bad, but credit card debt is by far the worst.
Building a solid credit score.
Over your lifetime, your largest expense will probably be interest costs on your mortgage, car loans and student loans. Having a solid credit score can save you a fortune by lowering your borrowing costs. Use credit cards to build a solid credit history by always paying off the balance each month. Putting all your bills on a card that’s automatically paid off each month is a sensible way to start.
Income and wealth are not the same.
There is a big difference between making a lot of money and becoming wealthy because your net worth is more important than how much money you make. It’s amazing how many people fail to realise this simple truth. Having a high income does not automatically make you rich; having a low income does not automatically make you poor. All that matters is how much of your income you set aside.
Save as much as you reasonably can.
Pay yourself first is such simple advice, but so few people follow it. The best investment decision you can make is to set a high savings rate because it gives you a huge margin of safety in life. You have no control over the level of interest rates, stock market performance or the timing of recessions and bear markets, but you can control your savings rate.
Live below your means, not within them.
The only way to get ahead financially is to consistently stay behind your own earnings power. Living within or above your means is how you end up going from one payday to the next without ever truly building wealth. The only way to get ahead is by living below your means and setting aside a portion of your income for the future. Think of it as buying yourself time in the future to do what you want, when you want to do it.
Look carefully at what you spend your money on.
You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. If you pay yourself first you don’t have to worry about budgeting; you just spend whatever’s left over on the things that truly matter to you.
Automate as much as possible.
The best way to save more and make your life easier is to automate as much of your financial life as possible. The goal is to make the big decisions up front so you don’t need to waste so much time and energy tending to your finances. If the bulk of your family’s financial life is on autopilot, it should only take you an hour or so each month to keep track of everything.
Get your biggest purchases right.
Do you really need a house with four or five bedrooms? Or a top-of-the-range four-by-four if most of your journeys are to and from your place of work? Personal finance experts tend to focus on relatively small expenses, like lattes and takeaways, but the most important purchases in terms of keeping your finances in order will be the big ones, particularly housing and cars.
Build your rainy day account.
Your monthly spending levels should take into account the fact that there are infrequent, yet predictable, expenses you’ll need to take care of on occasion. Weddings, holidays, car repairs and health scares never occur on a set schedule, but you can plan on paying for these events by setting aside small amounts of money each month to better prepare yourself when life inevitably gets in the way.
Insure the things that matter.
This is another margin of safety item. Some people have too much insurance and others have too little. Focus on the biggest risks that you and your loved ones face. Most importantly, consider the impact on your business or family if you were to die or become disabled. The idea is to measure that impact in pounds, and if possible, insure against it. Just remember that insurance is about protecting wealth, not building it.
Take full advantage of employer contributions.
Again, it’s important to pay as much into your pension as you reasonably can. But this is especially important for those in company schemes where the employer agrees to match the amount the employee puts in. Ideally, you should aim to invest the maximum amount that your company is willing to match. Failing to do so is like turning down a pay rise. No one in their right mind does that.
Increase the amount you save every year.
We suggest that you save between 10% to 20% of your income. The trick is to increase your savings rate every time you receive a pay rise so you’ll never even notice you had more money, to begin with. Avoiding lifestyle creep can be difficult, but that’s how you build wealth. And the sooner you begin setting money aside, the less you end up realising it never made it to your bank account to be spent in the first place.
Watch the company you keep.
Robert Cialdini has written extensively on the concept of social proof and how we mirror the actions of others to gain acceptance. Trying to keep up with spendthrift friends or neighbours is a never-ending game with no true winners. Find people to spend your life with who have similar money views as you and it will save you a lot of unnecessary stress, envy and wasteful spending. Don’t worry about keeping up with the Joneses; just follow your own path.
Talk about money more often.
It takes all of five minutes before people start talking about politics in almost any conversation these days, but somehow money is still a taboo subject. Talk to your spouse about money. Ask others for help. Don’t allow financial problems to linger and get worse. Money is a topic that impacts almost every aspect of your life in some way. It’s too important to ignore it and sweep it under the carpet.
“Stuff” won’t make you happier in the long term.
There is something of a short-term dopamine hit we get through retail therapy, but it wears off. Buying stuff won’t make you happier or wealthier because true wealth is all of the stuff you don’t waste money on. Experiences give you a better bang for your buck and time spent with the people you love is one of the best investments you can make.
Invest in your financial education.
There are countless personal finance books out there. If it bores you to death then at least skim through a few and pick out the best pieces of advice from a few different sources to test out. This stuff should be taught in every secondary school and college, but it isn’t. So you have to take the initiative. No one is going to care more about your money decisions than you. Invest some money, time, and energy into yourself. It’s the best investment you can make.
Know where you stand.
Everyone should have a back-of-the-envelope idea of their true net worth. Before knowing where you want to go you have to know where you are. That means adding up all of your assets and subtracting any debts. This way you can set some general expectations about savings rates, market returns and portfolio growth to give yourself some goalposts in the future.
Don’t neglect taxes.
Tax issues can be maddeningly complicated, but it’s important to have a basic grasp of how the system works. The most important thing is to use accounts that allow you to save and invest free of tax. Also, take advantage of tax relief on your pension contributions. As long as you’re willing not to have access to it until you stop working, this is effectively free money going begging.
Earn more money.
A combination of saving and cutting back on spending is a great way to get ahead, but it’s an incomplete strategy if you’re not trying to earn more by enhancing your career. Too many people are stuck in the mindset that there’s nothing they can do to get a better job, take on more responsibilities or earn higher pay. You must learn how to sell yourself, improve your skills and negotiate a higher income over time. A £10,000 pay rise could be worth hundreds of thousands of pounds over the course of your career.
Your goal is financial independence.
The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore. Time is the most important asset in the world because you can’t manufacture more of it. Becoming financially independent allows you to make decisions about how you spend your time on your own terms.
This is only intended for use by advisers who may distribute it to their underlying clients. Neither Timeline Portfolios Ltd, its directors nor its employees have contributed to the content, and it does not constitute advice.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.