Some financial rules to live by

by Ike Trotter

Published: October 15,2012

Tags: compound interest, Liz Pulliam Weston, personal finance, risk

One of the best pieces I ever read on money management was penned by a financial columnist Liz Pulliam Weston, who published a commentary a couple of years back through MSN Money titled “9 Money Rules to Live By.” Her common sense approach to money and life was refreshingly candid. Rather than churning out the usual canned answers, her comments reflected a straight forward approach to understanding and dealing with the economic rules of life. I hope you can find some practical use from what she’s written. Enjoy:

>> RULE 1 — Understand the difference between needs and wants. Our actual needs in life are pretty limited: food, shelter clothing and transportation. Most everything else is just “wants” which can be endless. Because our financial resources can take us just so far we have to make choices. Many people, according to the author, believe they have to spend money in certain ways or certain amounts when, in reality; their spending is but a choice. For example, if you’re facing a monster mortgage, it is because you chose to buy that home. Taking responsibility for our choices is scary, but also can be empowering. Otherwise, you’re just going through life aimlessly as a victim of circumstances.

>> RULE 2 — Scarcity can make choices for you. Whether it’s oil in the ground, cash in our pockets or our time here on earth, our resources can just go so far. People who ignore this reality are the ones who run out of paycheck each month before they run out of month. Furthermore, refusing to make the sometimes hard choices needed to responsibly manage money means more than likely fewer choices in the future.

>> RULE 3 — Understand what is called the “Hedonic Treadmill.” By this, Weston illustrates due to our human nature we quickly adjust to improved circumstances. A raise, a new possession may offer temporary happiness, but we soon take our situation for granted. As our expectations continue to rise, so does our mindset, which causes us to adjust and quickly want more. The message here: true happiness is more than a fat wallet.

>> RULE 4 — Don’t let excuses keep you down. Move on with your life. The sun will rise again tomorrow.

>> RULE 5 — Understand the role risk plays. Each and every human endeavor carries some risk and handling money is no exception. But if you want to accumulate wealth and beat inflation over time, you will need to handle some of the volatility that comes with it, as well. The key here is in finding a comfort zone where risk doesn’t keep you awake at night. In these situations, financial peace of mind becomes your best means of stomaching risk.

>> RULE 6 — Understand the time value of money. It’s a relatively simple proposition — a dollar earned today is worth more than a dollar received down the road. Why is this? Primarily because a dollar down the road will be “potentially” less due to inflation; or, that you might not get it at all in the event a debtor reneges on his promise or dies. Will Rogers had an interesting perspective on the time value of money when he said, “The best way to double your money is to fold it in half and button it up in your back pocket.”

>> RULE 7 — Know the miracle of compound interest. Let’s say I give you a penny today, and promise to double the amount every day for a full month. Under this scenario, how much money would you have in a month?

Day 5: $.16 / Day 10: $5.12 / Day 15: $163.84 / Day 20: $5,242,88 / Day 25: $167,772 / Day 31: $10,737,418

Of course, no one is going to double their money every day. But the concept shows how people who save relatively small amounts regularly can accumulate a great deal — mostly by interest that grows on top of the interest. Unfortunately, this also illustrates the problem when debts balloon out of control. That’s why its always more desirable to earn interest. . . than to pay interest.

>> RULE 8 — Know that every money decision comes with a financial cost. Furthermore, with every choice, there’s an opportunity cost. For example, if you go back to college, you give up income you could have earned by your continued work. However, with this cost comes the opportunity of more economic gain. Particularly in fields where one can make potentially much more over a lifetime than staying put where you are. Understanding the risks along with the opportunities gives us a much better chance of a sound decision.

>> RULE 9 — Don’t throw good money after bad. A “sunk cost fallacy” means an irrational belief that a further investment of money, time or effort can somehow resurrect what’s headed south. As the Kenny Rogers song goes, you got to know when to hold ‘em. . . and when to fold ‘em.

All in all, nine good common sense rules for the times we are living through right now. Putting good use to some of these ideas can serve us well as we approach the new year of 2013.

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