When it comes to your money - the decisions you make today will have a huge effect on how much of it you have later. A few good rules (or habits) early in your career could set you up with a substantial bank account by the time you retire. Better yet - with some hard work and good investments you can achieve financial independence years before retirement. We spoke to a few of our financial advisor friends and found that these 7 rules for your money will put you in good shape.
1. Pay yourself first
Most people will pay bills as soon as the check gets deposited. Whatever is left over (if any) commonly gets spent. You are the one logging the hours, why not pay yourself first? Have 10, 15, 20 percent (or more!) directly deposited into a separate account before you pay the bills. You will be amazed how quickly this account will add up.
Check out: Acorns, automate your spare change
2. Spend less than you make
This seems like common sense, yet most Americans struggle to save money. They make $1000 and spend $1000 (or more). Create a budget. Its quick and easy: Add up all of your monthly expenses and subtract that amount form your monthly income. Have a negative number? You either need to cut expenses or increase your income. Your income should ALWAYS exceed your spending.
3. Invest the difference
Once you have a surplus in your budget, it's time to put it to work. You could purchase individual stocks in your favorite companies, invest in ETFs or index funds, real estate funds, or a number of other places. The point is - the best way to generate wealth is to put your money to work.
4. Put aside enough for an emergency
Many financial advisors recommend putting 6-12 months worth of your income into a savings account or other safe place. The idea is to be able to cover your expenses if you loose your job or an unexpected expense comes up. The amount you need and where you park the cash will depend on your personal situation.
5. Prioritize tax efficiencies
Why pay uncle sam more than your fair share? If you are a high income earner, you should be putting as much as possible into your 401k or other tax deferred account. The amount invested will decrease your yearly tax bill. Other ways to reduce taxes are contributions to healthcare accounts, child care, donations, and tax-loss harvesting.
Check out: Personal Capital Tax Hacks
6. Build passive income streams
Did you know that a majority of millionaires have multiple income sources? It is a secret that the wealthy have known for years. It takes a long time to get rich with your salary. Having multiple sources of income, better yet passive income, is the fastest way to build wealth and achieve financial independence. Passive income includes stock dividends, real estate, online business, book sales or even teaching an online course.
7. Spend on happiness, save on luxury
Life is no fun if you don't get to do the things you enjoy. If you have achieved the first 6 rules you are well on your way to financial independence. Most millionaires admit that they spend their money on things that make them happy, such as travel and personal experiences rather than expensive cars and flashy jewelry. The luxury items are a status symbol for attention. If you want TRUE wealth and happiness - spend your money on experiences - those won't depreciate.