Here are some of the most important money lessons I’ve learned — handily boiled down to the five best financial principles to live by.
These have been pressure tested and highly researched and they work for anyone, at any income level, no matter what your age is — whether you’re starting with zero net worth, negative net worth or you have millions.
1) Don’t spend what you don’t have. Overspending leads to debt, and debt prevents you from getting ahead in life. It’s also a major source of stress and contributes to anxiety.
The most effective way to ensure you don’t overspend is to assign every one of your hard-earned dollars a specific purpose through a budget: $250 for public transit, $500 for groceries, $1,500 for rent and so on. If you don’t have money set aside for something you want or need today, you’ll have to save up for it.
You might be surprised to learn that self-made millionaires cite living within a budget as one of the keys to their continued financial success, even after they’ve achieved millionaire status.
2) Make more money each year. Increasing your income, even by only a small amount, will help you keep up with, and hopefully beat, inflation. Popular techniques to earn more include earning a raise or promotion through work or starting a part-time side-hustle (e.g., freelance contracting, teaching fitness classes, tutoring, etc.).
If you’re not getting ahead with the work you’re currently doing, don’t be afraid to “retool” your skills by taking relevant courses or training.
3) Save at least 10 per cent of everything you make. Before your paycheque evaporates, take at least 10 per cent of it and set it aside for your future; specifically your retirement.
If your employer offers a savings program, this is even easier to do because they can make the deduction from your paycheque automatically so you won’t forget. If your employer doesn’t offer this, then it’s up to you to set up automatic transfers from your chequing account on pay day.
In Canada, the two most effective places to put this savings are in a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Speak to a qualified, and highly recommended, financial adviser to set these accounts up.
4) Only use good debt. Student loans and mortgages (and sometimes business and investment loans, too) are classified as “good debt” because they are used to invest in your future. Any other types of debts are bad for your financial health — credit card balances, consumer loans, payday loans and the like — and these should be eliminated quickly and avoided in the future.
5) Marry (or partner) well. Who you partner with for your life can either sink your financial dreams or build upon your goals. If the person you love is spending all of your savings, or being a miser, you’re going to have problems, which can lead to divorce (and that generally has extremely negative financial consequences).
If you and your partner are not financially aligned, you need to get on the same page ASAP. And if there are any forms of financial abuse happening in the relationship, you need to leave.
In our go-go-go culture, it’s almost blasphemous to give this advice, but here goes: financial security builds slow and steady through good planning and discipline. So, be patient. And, celebrate your financial progress, even if it’s small.