10 Rules To Improve Your Financial Life (Part 1)

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10 Rules To Improve Your Financial Life (Part 1)

Thinking about money and its use is extremely important for the simple fact that we exchange our most precious resource for money, time. Thinking about effective ways to use money is the same as thinking about ways to have more free time, fewer worries, and a better quality of life.

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It doesn’t matter how much we earn if we don’t know how to use that amount wisely and effectively. It will always be like a swimming pool that, despite being constantly filled, never reaches a sufficient level for bathing. So, what rules govern a successful and prosperous financial life? What principles should we follow so that we can use money wisely, rather than being used by it?

What principles should we follow so that we can use money wisely, rather than being used by it?

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Rule #1: Make a Budget

The first step towards a better financial life and eventual financial independence is the act of regularly creating a budget, identifying our expenses, and what we are earning. I don’t need to comment that it’s better to have more money coming in than going out, right? However, sometimes we need to mention the obvious. The first step is to identify where the money is coming out, that is our monthly expenses. You can ask yourself:

How many expenses do I have?
What exactly are these expenses?
What is the individual price of each expense?
What is your total value of all the expenses?
After that, write down your different sources of income, if you have any other than your salary. Then, with the total amount of your bills and income, do a simple subtraction account and you will see if you are earning more than you are spending. The next step is to understand which proportion you can use to manage your money more effectively. So, let’s go to our second rule.

Rule #2: Apply the 50/30/20 Proportion

While the first rule gives us clarity on the net income we have, the second rule gives us a plan, a direction for how to manage our money. This rule mentions that:

50% of our income will go towards basic needs like food, transportation, rent, medical expenses, and the minimum payment of debts. That is, any need we may have for our subsistence. One way to identify if it’s a basic need is to ask yourself “what would happen if I didn’t pay for this?” or “Can I live without it?”.
30% of our income will go towards our “desires”, that is, “non-essential” items, such as entertainment, studies, traveling, eating out, shopping, among others. These are items that may be important to you and your life, but you could survive without them.
20% will go towards a better financial life, such as having an emergency reserve and investments. If you have debts such as loans and credit cards, among others, use part of the 20% to pay them off, as there is no point in investing if you are paying interest on interest.
Applying the 50/30/20 proportion is a great first step for those who are starting to have greater financial intelligence, as it offers, in a simple way, a plan for managing your resources. However, feel free to adjust the proportions to make a financial plan tailored to your situation and goals.

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Rule #3: Save at Least 10% Every Month

Our 3rd rule represents a fundamental step towards greater financial independence and control. Think of it this way: when you pay your bills and debts, you are paying other people. But when do you pay yourself? This doesn’t mean that you shouldn’t honor your commitments, but that you should allocate at least 10% every month to yourself. This is non-negotiable. This amount will take care of your future and help you achieve greater financial independence, helping you to get out of “emergency” mode. This is one of the most important rules to start using money as an instrument, instead of being controlled by it, or by someone who knows how to use it.

The vast majority of people, when they save, save less than 10%. In the United States, for example, one of the richest countries in the world, the average savings of the population is 7.3%.

If you can save more than 10%, great. However, be sure to save at least that much. Don’t disregard this rule thinking that 10% is not enough and that in the end, it wouldn’t even matter. Don’t forget the compound interest effect. Make it work for you.

Nonetheless, just leaving that 10% in savings isn’t pretty effective, it is necessary to learn how to invest. So let’s move on to our next rule.

Rule #4: Learn about Investments and Your Investor Profile

Get to know more about different investments and identify your investor profile, which will influence the types of investments you will make. If you are a conservative investor and adopt aggressive types of investments, you may act thoughtlessly and prematurely when an unexpected downturn occurs, which will result in the loss of your capital. On the other hand, if you are a highly aggressive investor and adopt a more moderate strategy, you may miss opportunities for a simple lack of research.

So, read personal finance books and learn more about different types of investment, such as:

Stocks, Mutual Funds, Etfs, Cryptocurrencies, Certificates Of Deposit, Bonds, Annuities, Investing In Housing, and Commodities.
After that, identify your risk tolerance. If you are not cold-blooded, be careful when exposing yourself to too much risk. I mention this because I have the profile of an aggressive investor, so I invest a considerable part of my capital in cryptocurrencies and, although at times the highs are incredible and the returns are significant, in a few weeks the situation can dramatically change and a considerable part of my capital evaporates. I don’t get obsessed with that because I think long-term and I’m physiologically and financially prepared for that. I wouldn’t use the capital that I would need in the short term for this kind of investment.

So, if you are not cold-blooded, go for more moderate and conservative investment styles, or perhaps simply allocate an acceptable percentage, such as 10% of your assets for riskier investments and the other 90% for more moderate investments. Remember, adjust this ratio according to your investor profile and risk tolerance. To check your investor profile, you can take this quiz out: What kind of investor am I?

Rule #5: Invest in yourself

Rule number 5 refers to the best type of investment possible, personal investment. Invest in courses, in education, in skills development, in your mental and physical health. Seek constant evolution and know that success is not something that happens overnight. The road to a successful life will not be complete in a 100-meter race, it is a marathon. So, know how to think long term. Which I know you are already doing by the simple fact of accessing this type of content. Do a little every day and the result will add up, remember the effect of compound interest.

Conclusion

Hey, guys! When I started writing about this topic, I identified that this was going to be a fairly long discussion. So I decided to make this topic a two-part discussion. Next week, we’ll be back with the next 5 rules to improve your financial life. However, in the meantime, try to apply these 5 initial rules in your life and see the result they can bring you. Remember, the first 5 rules to improve your financial life are: make a budget, apply the 50/30/20 proportion, save at least 10% every month, learn about investments and your investor profile, and invest in yourself. See you in the next chapter of this reflection!
Question: Hey, dear reader! What did you find of this episode? Leave your comment answering this question, “What am I doing to improve my financial life?”. Feel comfortable using the rules that we mentioned today, but also be sure to add your own reflection. See you next time!

CONTRIBUTED BY Mateus Fontoura

Read More: 10 Rules To Improve Your Financial Life (Part 2).

Read More: 8 Money Mistakes To Avoid in 2022.

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