Three Basic Money Rules That Everyone Should Understand
As a Certified Public Accountant (CPA), I have always had a passion for numbers as they pertain to an individual's finances. I’ve realized that for most people, dealing with finances means getting their bills paid on time. There isn’t enough emphasis on how we educate our children on the basics of financial literacy and the benefits of having a plan.
Understanding and applying financial concepts can range from simple to complex but every person should understand some key fundamentals by the time they enter college and the workforce.
Here are the three basic money rules I want my kids to understand:
#1 Security: An emergency fund is important
Saving until you have a cash reserve that will cover a minimum of three months of living expenses is a necessity.
The coronavirus pandemic showed many of us how fragile our employment and the ability to pay expenses can be. Set aside this emergency fund in a money market or certificate of deposit account that is separate from your primary account that is used to pay bills. The idea is that you should never have to utilize this account but it will serve as a safety net if ever needed.
As you go through the different stages of life, the amount required for this fund will vary as your expenses change. There is a lot of stress that can be relieved knowing that your bills can be paid if unforeseen circumstances should arise.
#2 Discipline: Pay attention and monitor what you spend and save
Everyone wants to live a comfortable lifestyle and have nice things. The key is to live below your means whenever possible. Identifying and saving for the items that are important to you should be the main objective versus spending money in an impulsive manner.
Having a budget that shows monthly income compared to monthly expenses is a valuable tool. Money going out must be less than the money coming in. This action will keep you from accumulating debt and the subsequent consequences.
Including a payment to yourself each month as savings will create a great life habit and the dollars put aside can ultimately be spent on your most important items.
The end game here is to not owe anyone except yourself (no credit card debt, no car loans, paid off student loans). You want to accumulate assets that will appreciate in value and provide for your future.
#3 Knowledge: Have a basic understanding of taxes and the implications on building wealth
You will be faced with many choices throughout life and navigating the tax system in a positive manner is extremely helpful.
Enrolling in your employer’s 401K plan is a great way to save money and defer taxes, especially when they provide a matching contribution.
Saving for college through a state-sponsored 529 plan is another smart avenue for education.
Investing in the stock and real estate markets can also contribute to building wealth; while a basic understanding of the tax implications can help save even more.
Ultimately, your money should be working for you.
These three rules are necessary to building a good financial foundation. Knowledge combined with Discipline and a sense of financial Security gives one the ability to take advantage of opportunities that will come along during life's journey. Hard work and smart moves can build wealth and create future financial freedom.
If you need help setting yourself up for success, please contact us to discuss how we can provide short term help to put you on a path toward financial security.