Seven essential principles for being better with money
Being good with money means different things to different people but at its core it means not worrying about it, being able to enjoy life now and having financial security when you can’t or no longer wish to do paid work.
Mistakes, I’ve made [more than] a few!
It pains me to admit it now, but I was an absolute train wreck when it came to managing my own money during my 20s. I was quite good at earning it, but even better at spending it. Looking back, I think I justified my spending actions by telling myself that life is for enjoying and I was young enough to recover from any excesses or mistakes.
Thankfully, I’m a fast learner and have always had a hunger for knowledge. Over the years I’ve read several hundred personal finance books and research papers. I’ve listened to hundreds of podcasts, videos and talks. And over the 25 years I was a financial adviser I interviewed nearly 1000 people about their money.
Getting direction on life
When I hit 30 my wife and I sat down with the late, great David Norton, who was my financial planning mentor. David helped us develop a personal financial plan based on what was important to us at that time. We agreed that there were four key priorities that involved money:
- To be debt free by the time I was 50
- To be financially independent (paid work would be optional) by the time I was 50
- To be able to give our children a great education and good start in life
- For my wife to have the choice of whether she did paid work while our children were young
It was great having clarity over what was important to us and why, and it had an amazing impact on our personal finances. While there were lots of twists, turns, setbacks and obstacles over the years, we gradually developed better money habits and behaviours.
My family lives a relatively simple life, which means our money goes quite far. We feel very grateful for the fact that we’ve had some luck along the way and stayed physically and mentally healthy. I’ve seen many people thrown financial and health curve balls that blew them off track, despite their best efforts.
Taking stock at 50
I’m pleased to say that as I approach my 50th birthday we’ve pretty much achieved those priorities we set out 20 years ago. However, I have no desire or intention of stopping work. Far from it. I love the speaking, writing, consulting and angel investing I do these days.
Seven money management principles
There are lots of ways to be better with money but here are the top seven that have helped me the most:
Be clear on your life priorities, why they are important and the role of money in achieving them.
Develop and follow a monthly spending plan that is aligned with your priorities, and which includes all your expenses, including those inevitable but unquantified things like house and car maintenance, holidays and Christmas. You want progress, not perfection so be prepared to be flexible and adaptable.
Continually invest in yourself in terms of skills and capability to improve your earning power, but don’t chase the highest paying work if it makes you unhappy or unfulfilled.
Other than a mortgage to buy a home (or rental property) never use debt to buy anything. Debt will be a drain on your cashflow and restrict your ability to build wealth.
Grow your lifestyle costs slower than your income so you have surplus that you can save and a lower cost post-work lifestyle to save for.
Don’t compare yourself to how others live. In many cases people with an expensive lifestyle and lots of material possessions give an illusion of wealth. There’s a good chance they are up to their eyes in debt and have little, if any, financial security.
Invest at least 20% of your income each year, through direct debit or payroll deduction, in a global equity index fund via tax efficient accounts like pensions and ISAs for the long term.
This list isn’t definitive and there are lots of other ways to improve your financial position, but they are the ones that have had the biggest impact for me and my wife.
Best of luck.
PS The picture is one I took of my extended family while on summer holiday in France in 2014. I happened to be standing behind them, while they were looking out over a beautiful lake and I thought it encapsulated a lovely and precious moment in time.