To many people, understanding personal finance and economics can be a confusing thing causing them to make serious mistakes with their money. However, if you follow some simple rules, you can lessen the odds of financial disaster and make your money work for you.
- Know the difference between wants and needs. Basics such as food, shelter, clothing and transportation are needs. Everything else is a want. Learn the difference- save more money. Take responsibility of your spending choices and see how your bank account stays steady.
- Lack of availability will make a choice for you. Just like the oil supply, if there’s a scarcity of money in your pocket then you can’t be overabundant in your spending. If you ignore this, then you have too much month at the end of the money and nothing put away for the future.
- Stay off the hedonic treadmill. No- this isn’t the latest in workouts, it means that we adjust all to quickly to improved circumstances such as a raise in pay or a new possession that make us happy for a while. Unfortunately all too soon we take this improvement for granted and go overboard making our finances suffer the consequences.
- Every money decision comes with a price tag. Opportunity costs you. If you give up work for an education then you lose potential earnings and possibly have high debt before you even graduate from student loans. If you give up higher education for work, you lose the potential to have a higher paying career. The good news is that most college graduates make over 70% more than those with just a high school diploma. But choose your major wisely and make sure it relates into a field where there is demand for workers.
- Supply and demand. This doesn’t only relate to the economy but to your finances as well. This rule also relates to pay rates. If you have superb or rare skills that are in high demand by employers, you can negotiate higher pay. On the other hand, limited skills can result in lower pay.
- Don’t throw good money after bad. If you make an investment on something that fails, don’t repeat that action. Don’t hang on to sunk shares. Cut your losses and sell.
Granted there are tons of other “rules to live by” when it comes to finances, but these are some of the ones that are most common and widely applied.