Personal finance is tough. I’ve spent a long time studying the subject and keeping tabs on my family’s finances and it’s still a struggle sometimes to continue growing our net worth.
So I don’t blame you if you’ve made a lot of mistakes. It’s okay because we ALL have. But if you don’t start learning and fixing the negative, you’ll never have a net worth that is positive.
Alright, my friends. Today’s that day. On this date, in whatever year you’re reading this, you’re going to start learning the financial lessons that matter.
The following 17 financial lessons are the most basic principles of finance that you can learn. These lessons are simple and effective, allowing you to learn what actually works for successfully managing your personal finances. I’ve done it. Now let me show you.
17 financial lessons you really need to learn this year
1. Living below your means
Understanding what it means to live below your means is absolutely crucial when it comes to personal finance. If you could only learn one financial lesson and stick with it for your entire life, this one would probably be the most important.
Don’t get it twisted, though, because all of the lessons on this list are important. But living below your means can allow you to pay off debt, build an emergency fund, save, invest, give, and grow your wealth like crazy.
Living below your means is simple: spend less than you make. If you make a certain amount per month, you spend less money than that amount in that month. After it’s all said and done, you have excess money to put toward your financial goals. So start working on spending less and making sure your total expenses are less than your income. That’s the easiest way to live below your means.
But you have to continue living like this in order to make substantial financial progress. You can’t just do this for one week or one month or even one year. Living below your means is a lifestyle and becomes part of you after awhile. That doesn’t mean you can’t have a fun, enjoyable life. You just have to live on a little bit less so that you can hit all of your financial goals.
2. You have to budget (and know your expenses)
Budgeting is EXTREMELY important. That’s why it’s the next lesson on this list. If you truly want to control the money you make, you have to create a budget that can help you control every dollar that comes in. The concept is very simple. Budgeting is writing/typing out your monthly expenses and income and using a spreadsheet to track how your dollars are spent.
But a lot of people hate budgeting. Sometimes because they’re not good at budgeting or because they’ve never done a budget before. Other people believe that budgeting is really limiting to their ability to spend money.
But none of this is an issue. Here’s why:
Budgeting might be tough at first if you’ve never done it. But you will get better at it. If you’ve never done it before, just do your best to create a budget and go from there. Lastly, budgeting is only limiting in the sense that you force yourself to live below your means. The budget is a tool to assist you. So the budget is actually permission to spend your money.
If you perfect your budget, it’s easy to start crushing your financial goals.
3. Educate yourself on personal finance
So the first two lessons were really meant to lead up to this lesson – educate yourself on your personal finances. You might think that what I just said was a ridiculous statement, but there are millions of people who have no clue how to manage their own personal finances. What’s worse is there are people who have no idea what their personal finances even look like. That’s not good.
If that’s you, you’ve got to start looking at your own personal finances TODAY. It is extremely important to know and understand where you are financially. Because you could have thousands in debt and only be hurting yourself worse with each decision you make.
There are a couple of things you need to know:
- How much debt you have.
- How much money you spend per month and…
- How much you make per month (and per year).
If you don’t know those three things, you aren’t paying attention and it’s time to start!
4. Destroy your debt
DEBT SUCKS. It’s really that simple. Debt robs you of your income and only makes the lenders rich. If you really want to start crushing your financial goals and building wealth, you have to eliminate the debt from your life forever. And yes, I mean forever…as in you don’t borrow any money for anything ever again. That’s what I decided to do. And it worked.
So in order to get rid of your debt for good, you need to know exactly what you owe. List all of your debts out smallest to largest and start tackling them one by one. Pay minimum payments on everything but the smallest debt. Attack that debt with a vengeance.
Once you pay off a debt, add that money to the minimum payment on the next debt you owe. That’s called the debt snowball. After you pay off a few different debts, you should have a decent chunk of money from all of the different payments you owed. My personal debt snowball got up to about $1,000 dollars when it was all said and done.
Each time you pay off a debt, it gives you motivation to keep going. That’s why interest rate doesn’t matter. It’s not about the math. It’s about changing your behavior and finding motivation in paying off your debt. The debt snowball is simple and it works. The debt avalanche is complex and doesn’t work (the debt avalanche is simply paying off debt by highest interest rate to lowest).
Keep it simple and you WILL succeed in your #debtfreejourney.
5. You have to have an emergency fund
The emergency fund is hands down one of the most important concepts in all of personal finance. An emergency fund, otherwise known as a “rainy day fund” or “grandma’s rainy day fund,” is simply having funds set aside for when an emergency hits. I consider this money “emergency insurance.” And it can keep you from going back in debt. Having one and not having one can literally mean the difference between debt and no debt.
If you currently have debt, I want you to go with a starter emergency fund of $1,000 dollars. Get that money together as fast as possible or set it aside if you have it already. This may not seem like a lot but it will help offset any emergencies that might cost a little bit more. This also might seem uncomfortable to only have $1,000 dollars but it’s meant to feel this way for a reason. The reasons is you have to get out of debt as fast as possible!
After your debt is paid, you need a fully funded emergency fund of 3-6 months of expenses. If you’re unsure of your expenses, check your budget and/or add up all of your normal necessary expenses for a month or two. A decent month of expenses is around $3-5,000 dollars. Ours is a little over $3,000 dollars so we went with a 3 month emergency fund of $10,000 dollars.
Lastly, remember that this money is for emergencies only, not for spending. Again, this is emergency insurance and is meant to protect you. Don’t use it for anything other than an emergency. Christmas or a new tech gadget is not an emergency. Tires on your car is not an emergency (unless there’s a blowout). All of that stuff can be saved up for over the course of a few months.
Emergencies might be a hospital emergency room visit, a blown tire, A/C repair, your car completely dies, or your water heater needs replacing after it goes out. Or like I just had, a pipe bursts in your kitchen, on the weekend, and it costs $3,700 dollars to fix. Fun…but this is why you have an emergency fund.
6. Money isn’t evil
The next lesson you need to learn is about money itself. A lot of people believe that money is evil and that rich people are just evil and greedy. This is simply not true.
Money is just an inanimate object, a tool, and something to be used to trade for things you want and need. Money is just a thing. Money can’t be good or bad because it’s just paper or an electronic number on a screen. But money will magnify a person’s true self.
For example, if bad people get rich, they tend to only get worse in reference to personality, generosity, and lack of kindness. These are the few and far between that are the “rich and greedy” that tend to stereotype all of the good people who have built wealth.
Good people that get rich are a blessing to the world. Most millionaires are actually just decent, hard-working people who strive to be extremely generous. But a lot of that goes unseen. It’s honestly pretty sad, but it’s up to you and I to help change that stereotype. So what kind of person are you?
7. The value of money
Another great financial lesson to learn is the value of money, including what things cost and how to work hard for those dollars. Hopefully you’ve learned this growing up but it’s not too late if you haven’t.
First, money isn’t free. And just like a lot of parents say, “money doesn’t grow on trees.” Second, everything that you have to pay for adds up and you have to work hard to continue paying for those wants and needs.
Let’s think about this in terms of your salary. Let’s say you make $20 dollars an hour and you eat out one time and the bill is $20 dollars. That means you worked an entire hour just to eat that food. Or that grocery trip, which was $100 dollars, was 5 hours of work at your job. Think of money like that and you will undoubtedly value your money more. So get to work!
8. Start investing EARLY
The 8th lesson on this list is to start investing as early as possible. The reason you want to start investing early is because of a simple yet powerful concept called compound interest. The earlier you start, the more you can take advantage of it.
Compound interest is when your money earns interest, and then every year after the first year, your money and your interest earn more interest. It’s pretty crazy, so let me show you how it works.
Example 1: If you put $100 dollars into an investment account, and you earn 10% interest, after year 1 you’ll have $110 dollars. If your money earns 10% again in year 2, you will earn interest off of $110 dollars instead of $100. So in year 2, from $110 dollars and 10% interest, you earn $11 dollars. Okay, cool. Not much but you keep earning off of the interest. Year 3, you’ll earn money from $121 dollars in the account. In the first couple of years, you won’t earn much. But after 25 or 30 or 35 years, the interest REALLY starts adding up. After 30 years, your $100 dollars becomes $1,744 dollars. After 35 years, it becomes $2,810 dollars. After 40 years, $4,525 dollars. And after 50 years, $11,739 dollars. Doesn’t seem like a whole lot of money, but that all came from $100 bucks and no additional money added.
Example 2: if you make minimum wage, you could probably afford to invest about $100 dollars per month. Just $3.33 a day or $100/mo for 20 years at 10% interest will be $75,603.00 dollars. That same amount for 25 years will be $129,818.00 dollars. In 30 years, you’ll have $217,132.00 dollars. In 35 years, $357,752.00 dollars. And after 40 years, you’ll have $584,222.00 dollars! Pretty crazy how fast your money goes up after 30 years. If you continued investing $100/mo and left it for 50 years, you would have $1.5 million dollars! That’s crazy. Now just imagine if you were able to invest $200, $300, $400, or even $500 per month! You’d easily become a millionaire.
Example 3: Let’s give a dollar amount that anybody can invest to become a millionaire. Let’s go with $6.67 cents a day or $200 per month. That’s basically the cost of a Starbucks Frappuccino. In 30 years, that $200 per month will become over $484,000 dollars at 10% interest. After 35 years, you’ll have $715,500 dollars. And in 40 years, you’ll be a millionaire with $1.16 million dollars in there.
Example 4: let’s say you really wanted to ramp it up and you could afford $500 per month. That’s less than the cost of the average car payment in America as of 2022. If you just fully fund a Roth IRA every year ($500 per month or $6,000 dollars per year), after 30 years you’ll have over a million dollars. If you left that for 35 years, that million turns into 1.78 million. And after 40 years, you’ll have 2.92 million! That’s crazy!!
That is the power of compound interest!
9. Everything on Autopilot
Now that you’ve gone through the first 8 lessons, number 9 is going to be pretty dang simple: I want you to put all of your finances on autopilot.
Start with all of your bills. Put everything on auto-draft so that you can easily take care of bills and never forget to pay. That’s a small stress you can take off yourself. Just make sure you pay attention to your bills every month to make sure what you’re paying is correct. All debt payments, too. Put minimum payments on autopilot so that these are taken care of while you’re attacking the smallest debt you have.
Once you’re out of debt and have you’re emergency fund in place, you can put your 15% towards investing on autopilot so that it always comes out every single month. That’s another thing you don’t have to think much about. Again, just pay attention to your bank account and your investment account so that there are no issues and everything is in good order.
Once you’ve gotten out of debt and are investing 15%, this is where you can start savings money toward different things – i.e. some stuff you want or some necessities you may need. I would highly suggest putting this saving on autopilot so that it automatically comes out of your bank/paycheck before you have a chance to spend all of your money. I’m fairly disciplined with money, so I usually have some left over at the end of the month. But I still take any savings out as soon as I get paid and force myself to live off the rest.
As Warren Buffett likes to say, “don’t save what is left after spending, but spend what is left after saving.” This simple quote just says “pay yourself first.”
Lastly, if you’re doing any other saving or investing, I highly recommend taking it out of your bank as soon as you get paid. The “pay yourself first” concept is one of the most important concepts in all of personal finance and has been around since the 1920’s when it was coined by George Samuel Clason and introduced in his world famous book, “The Richest Man in Babylon.” Get a copy or read that here on Amazon.
10. ALWAYS take the match (if possible)
A match is simple: if you invest into a company retirement plan, your company might “match” your contribution up to a certain percentage. Most companies give about a 4-6% match. This means that if you put a certain percent of your paycheck, such as 4-6% into the investment account, they will match that amount. Once you go past that amount, they stop contributing. But it’s still the best way to invest. Why? Because it’s free money!
Remember this when it comes to investing: match beats Roth beats traditional.
Always take the match first. If your company doesn’t give you a match, open up a Roth IRA or see if your company/state has a Roth 457(b), 403(b), or 401(k). If not, open that Roth IRA. If you’d like to stick with a traditional 401(k), you can do that, but it’s Ill-advised as you’ll be paying taxes on all the money you have at retirement. With a Roth, you pay taxes up front and nothing on the money during retirement. That sounds much better to me. If you’d like to learn more, check out Dave Ramsey’s post on the 401(k) vs. Roth 401(k) here on their site.
11. Don’t invest in anything you don’t understand
This lesson is very simple – don’t invest into anything you don’t understand. If you don’t really get how the stock market, mutual funds, or 401(k)’s work, don’t immediately dive in. Take a month or two and really learn it all. I wouldn’t suggest skipping out on investing for too long, though.
Get up with a financial advisor and have them teach you about everything investing-related so that you can make a wise choice when you finally dive in. Also remember: it’s YOUR money so YOU make the decision on where it goes.
12. Have a plan and set money goals
Having a written, detailed, and specific plan for your money is one of the most important lessons for long term success in all of personal finance. If you don’t have a plan, you plan to fail. With personal finance, you have to have a plan or your money is going to get frivolously spent and you won’t make any progress toward saving or investing. Having a plan is your roadmap to fixing and finding success with your finances.
You also have to have goals for your money. Having a plan is only half the battle. If your plan is your roadmap, your goals are what you hope to achieve at different points along your #financialjourney.
For example, goals that I have are to pay off my house in 5 years, become a millionaire in 10, and help my son go to college without any loans or debt. Those are some of my financial goals and I’ve set up a plan to do all of that.
For the best financial plan, check out Dave Ramsey’s financial plan The Total Money Makeover. It’s a simple yet powerful book that has shown me the path toward financial freedom. Get a copy here on Amazon.
13. You need to be protected
One financial lesson that not a lot of people understand and many take for granted is having the right insurances in place so that you and your money are protected. It is imperative that you have the proper insurances in place while you work on building wealth. Because if you don’t, and something terrible happens, you could jeopardize years of hard work and money growth.
Here are the 6 insurances that you should have:
Term life insurance: an absolute must, especially if you have a family. You want term life over whole life because whole life is incredibly expensive and you won’t need life insurance after the term period. Why? Because you’ll have had time to build wealth and become self insured with hundreds of thousands of dollars to your name. Grab a 20, 25, or 30 year policy. They’re ridiculously cheap if you’re healthy and will allow you to continue making wise financial choices while giving you peace of mind in the meantime. You HAVE TO have this life insurance. If you don’t, and you die with no money, your spouse and children are really going to struggle.
Health insurance: this is extremely important to help cover major medical issues and situations. For anything under $5,000 dollars, you should be easily able to cover that with your emergency fund.
Car insurance: you’ve got to have car insurance to cover the loss of your vehicle and to protect yourself if you cause the accident. This stuff is normally overpriced but you need it. So try to keep your driving record clear to keep these costs down!
Disability insurance: this isn’t required, especially if you’re healthy, but you never know. I personally don’t carry disability. But it’s always
good to have something to help pay you out a disability income if you were unable to continue working due to an illness or injury.
Emergency fund: this isn’t technically insurance, but I call this “emergency insurance” because it helps to protect you from all of life’s emergencies. The emergency fund basically helps to insure that you can take care of the emergencies while staying out of debt.
Umbrella insurance: this is a must once you start accumulating wealth and have a net worth of more than $500,000.00 dollars. This insurance can help protect your wealth by providing extra liability insurance to cover claims, lawsuits, and damage that would otherwise not be covered by regular auto or homeowner’s insurance. This is very important for higher net worth individuals so that you can protect the money you’ve earned in the event of a situation that could devastate your finances. It’s also fairly cheap for a million bucks of this (and cheaper for every additional million dollars of coverage).
Be smart. Get what you need to protect your finances.
14. Think long-term
When it comes to your financial goals and your overall personal finances, you need to think long term. Too many people live for the weekend and don’t think about the fact that building wealth in life is a decades game. I mean, most people don’t even know that you can build wealth. Why? Because it’s drilled into your mind that you can’t. That’s a complete lie. ANYBODY can build wealth, but you have to do the right things in order to get there. Because it takes a long time to build wealth. You don’t become a millionaire overnight.
Anybody, even the average person, can become wealthy if they just do a few things the right way in their finances: live below your means, budget your money, get rid of debt, understand your personal finances, have a 3-6 month emergency fund, understand the value of money and that money isn’t evil, and save and invest through your entire working career. That’s the recipe for becoming a millionaire.
The crazy part about it, though, is that you could spend almost everything you have in your life and still get rich over time. If you just invested $500 bucks a month for 30 years, that’s a million bucks. Pay off your house, too, and you’ll be worth around 1.3 or 1.4 million. That’s so simple it’s almost hard to believe. But it’s the truth. So what do you believe? Are you going to let someone else tell you that it’s impossible or are you going to start building real wealth?
15. You still need to have fun
After it’s all said and done, you have to have a little bit of fun with the money you have. But I want you to really hear me on this. Sacrificing to pay off debt is REALLY important for a very short, 12-24 month period of time. Some people can’t even fathom sacrificing fun for this period of time.
But I can tell you that it’s worth it. I believe so much in sacrificing for a short period of time, that we’re going to sacrifice just a little bit longer to get our house completely paid off. We’re still going to go on vacation and buy stuff, but we’re still living well below our means. And we will soon have a completely paid off house at 35.
If you’re not that hardcore, that’s okay. Just get your debt paid off in a short period of time and then you can live a great life from all the cash you will have. Because you’ve got to have some fun.
16. You need to give
I’ll admit that my giving muscle is not the strongest. I’ve been so hardcore about saving, paying off debt, and being frugal for so long that it’s hard for me to part with my money by just giving it away.
But I’m working on it and my family’s big giving goal is to be able to give more generously whenever someone is in need. So just like your physical muscles, you have to continue to work your giving muscle in order to grow it and become a more generous person.
17. Take care of your health
As the old adage goes, “health is wealth.” Something that I wish I would’ve taken advantage of when I was way younger. Now being over 30, I’m starting to feel some of the punishment of really not taking care of myself when I was in my early 20s.
This applies as a good financial lesson because taking care of yourself can help you keep working later in life to make more and to enjoy some of the spoils of that wealth you’re going to build. This might cost you a little bit in the short term, but the long term benefits can be tremendous.
Finally
There are a lot of lessons to be learned in this post. From living below your means to having goals, paying off debt, protecting yourself with insurance, and giving. Hopefully you’ve been able to learn a little bit and can start applying some of these lessons in your own life. Because if you apply everything to your life that I’ve just written, you will undoubtedly build wealth