Commandments

  • Save at least 10 percent of your yearly income.
  • Have goals for yourself — and write them down.
  • Do not spend money on items you cannot afford to pay immediately.
  • Treat credit cards like a privilege, not a right.
  • Have a cushion for yourself.
  • Stay on top of all purchases, bills, and other financial information.
  • Keep it simple when it comes to personal finance.
  • Have a disciplined plan, but be flexible when necessary.
  • Do not go it alone — ask for help.
  • Reward yourself within reason.

For more detailed information on each one, keep reading.

Save at least 10 percent of your yearly income.
The current recession has taught people to start saving money again, which can be looked upon as a silver lining to this storm. For years, the savings rate was less than 0 percent, meaning people were actually spending more money than they made. That’s a recipe for disaster. The law of compounding interest tells twentysomethings that if they can begin to stash money away now in different savings accounts and stocks, that there will be more time for the money to grow on its own. Ipso facto, at the end of your working career, your money will have had more time to collect interest and give you a bigger nest egg. The problem is, generally speaking, twentysomethings don’t have high incomes and consequently do not have the ability to stash away as much cash.

Don’t let your current financial situation, whatever it may be, force you to believe you can put off saving money. Start small. Stash 10 percent of each paycheck away for savings. It’s important to know what you’re saving for (another commandment), but I suggest you put away enough money for an emergency fund — approximately three to six months’ worth of living expenses — first.

Have goals for yourself — and write them down.
I’m a firm believer that nothing becomes concrete until it is written down, tangible, literally in your hands. This goes for your financial goals, too. It doesn’t have to be an elaborate spreadsheet breaking down goals into weekly checkpoints. It can be a simple list of short, medium, and long-term goals that you would like to work toward. I suggest you put them inside your budget book, wallet, or wherever you will see it when you assess your finances.

Honestly, it can be a simple bulleted list. Here are mine as of right now:
Short-Term Goals:
— Stay in the black.
— Remain on top of day-to-day finances.
— Keep disciplined.
— Enjoy myself within reason.

Mid-Term Goals:
— Save money for my gym membership.
— Save money for next summer’s vacation.
— Continue contributing to 401(k).
— Save money for Roth IRA.
— Establish/maintain multiple revenue streams.

Long-Term Goals:
— Purchase or rent a place of my own.
— Pay off all college loans in full.
— Become financially independent.

That’s it. I have it inside my budget book so I’m constantly reminded of what I’m working toward. I highly suggest you do as well.

Do not spend money on items you cannot afford to pay immediately.
This is really more common sense than anything else. If you don’t have the money to buy something you really want, force yourself to wait, save, and get the money to buy it later. This is a good exercise in self-discipline, especially since credit cards are so easy to get and, when used improperly, can lead to disaster. I’ll explain more in the next commandment.

With that said, there are a few exceptions to this rule. I believe that, in addition to emergencies of a medical nature or totaling a car, there are three basic items that you shouldn’t feel bad about purchasing without having all of the money for it upfront: an education, a house, and a car. This doesn’t mean you should put $5 down on a house that costs $500,000, but unless you’re blessed with a vast sum of money, you will have to take out loans and pay off these items monthly. We’ll talk about budgeting often on Living With Common Cents.

Treat credit cards like a privilege, not a right.
It’s really easy to get credit cards. It’s also fairly simple to get ones with high credit limits, though credit card companies are forced now to be a tad more stringent regarding who they approve. Credit cards can be a great tool, especially ones with cash rewards and otherwise when you spend enough money. The problem is, once you fall behind on your credit card payments and only pay the minimum balance (usually about $10 or $15), the interest rates can reach upwards of 20 percent per month. Most loan sharks wouldn’t think of charging that much.

Use your credit card wisely, and only use it for items you know you could pay off that moment if you had to pay in cash. The interest rates are too overbearing and the stakes — a poor credit score — are too high for you to fall into credit card companies’ trap. Seriously, it’s not worth it.

Have a cushion for yourself.
Obviously things happen in life. You know, those unexpected issues that you didn’t plan for. Your car may break down, you may need to get some teeth pulled, lose your job, or God forbid you find yourself in the hospital for an extended period of time. While you may not foresee these major life-changing events, you can try to create a buffer for yourself by having at least three-to-six months of living expenses stashed away in an interest bearing savings account that you can access at any time. Money markets are good for this, since they generally give slightly better interest than standard savings accounts. Certificates of deposit (CD) have better interest rates than the other two I mentioned, but generally cannot be accessed without penalty until its term (can be anywhere from three months to multiyear depending on what you pick) is complete.

I only have a three-to-four month emergency fund in my money market account, but that is because I have at least two months’ worth of cushion for each of my budgeted expenses in my checking account. That way, I have some breathing room and avoid risking overdraft penalties.

It may take some time to build this account up to the amount require. You might also think that you’re missing out on investing in a 401(k) or other long-term accounts, but if you should need to tap into funds for unforseen expenses, you’ll be glad you sacrificed the time to do this.

Stay on top of all purchases, bills, and other financial information.
This may seem like another bit of common sense, but you’d be surprised how many people throw away receipts, never reconcile a checkbook, and then seem surprised when they go to the ATM and can’t take out $10 dollars to buy a six-pack of beer. It is so important to keep track of your expenses, your bills, and your account balances. I suggest going out and buying a budget book — they run about $3 – $4 dollars at virtually any convenience store. While you can keep track of your accounts online, I also suggest that you maintain a paper balance for each of these accounts as well. You can’t always rely on the power of cloud computing to keep your finances in order.

You should also keep your receipts each month, just in case a false charge comes up on your credit card bill. That way, you can dispute the charge and save yourself from fraud. Make sure that after each credit card bill is paid that you shred all of your recepits, so sensitive account information doesn’t get into the wrong hands.

Keep it simple when it comes to personal finance.
Don’t overthink your finances. You may be tempted to do this every time you see a commercial about a financial services company, but I can tell you from experience that you can only do more harm than good. Make a plan, stick with it, and move forward. If you have a sound foundation in place, then there is no need for you to check your accounts every single day, revamp your allocations every week, etc.

If you’re saving for five or six different goals after you’ve established an emergency fund, you don’t need a separate savings account for each one. I saw that encouraged on a personal finance Web site and did a double take. How many people sincerely want to have seven separate savings accounts? Open one, have a budget book that separates all the money you contribute to it for your separate goals, and move on with your life. I have one checking account, money market, certificate of deposit, 401(k), Roth IRA, and brokerage account. The money market and CD are at the same banking institution. I try to streamline things as much as possible — and I hope you will, too. There’s only so much you can keep track of before something may unfortunately fall through the cracks.

This also goes for investing in stocks or funds. The stock market, especially now, takes more dips and jumps than we’re used to. Historically, the stock market has shown that you will get a positive return on your money, but you will have to endure some hiccups. If you’re just out of school and my age (a twentysomething), you have plenty of time to ride out the bumps in the road. In fact, I firmly believe that until you can contribute fully to a 401(k) and IRA (Roth or Traditional), you shouldn’t be dabbling in stocks. You can contribute $5,000 per year to an IRA. The 401(k) is a tad more complicated, largely because it is tied to a formula tied to a quarterly Consumer Price Index for all urban consumers. This year, the max is $16,500. Next year, though, there are reports that it could drop to $16,000. Basically, contribute the same percentage of your paycheck that your company is willing to match, if it does that sort of thing. At the end of the day, if you’re contributing approximately $15,000 per year and have money left over, do what you think will work according to your own goals.

Basically, just keep things simple for yourself. We’re not all rocket scientists, and we shouldn’t be tempted to look at our finances in that same light.

Have a disciplined plan, but be flexible when necessary.
I’ve talked about how important it is to set goals, create a plan, and to stick with it. While you shouldn’t succumb to every wind of change, there are some times when life events will occur when you will have to readjust your plans accordingly. Pay cuts, raises, increased insurance premiums, new family situations, moving to a new place, and other events will obviously force you to look at the way you budget. You may have to change things a bit, or you may not.

Have a strong base, but be willing to readjust if you have to — don’t let life or your finances pass you by.

Do not go it alone — ask for help.
Your personal finances are personal, but that doesn’t mean you should take this journey alone. To give yourself the best chance for success, I suggest you take the maxims from this Web site, as well as others, and assess what you think will work best for you. I also suggest talking to someone you trust, whether that’s a family member, friend, financial planner, God, whoever you believe is looking out for your best interests. Lay out your plans, and see what they think. You don’t have to do what anyone else says to the letter, but I strongly suggest utilizing other people’s experiences, as they can only help you better forge your own financial plan.

Reward yourself within reason.
This last commandment is the one I struggle with the most, to be honest. I look at what I have, and I’ve always been afraid to tap into it because I like to see the numbers going up — not down.

It’s important to remember that money is a tool, and tools are to be used. It’s like the servants and the talents I talked about in my Epiphany (link to Epiphany blog) post. If you bury your tools and do not use them, you’ll lose them. Especially as twentysomethings, this is the time we can go out and enjoy ourselves. We need to save some money for ourselves to go out, have fun, see a movie, pursue a hobby, do whatever it is we like to do after we leave our jobs.

Obviously we need to spend within reason and not fall into debt because of a few bar tabs, but we should splurge every once in a while. The entire point of budgeting and planning is so that we can enjoy ourselves. We save toward our goals, that proverbial rainy day. That way, when it pours … we’re ready.

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