6 basic rules to financial freedom

January 31st, 2011 Doug Benjamin
young family

Managing your finances can be a confusing and daunting process. But the reality is that mastering money isn’t that difficult. If you stick to a few basic rules and principles you’ll set yourself up for a life of financial freedom.

Keep in mind that most of these rules are behavioral in nature, and changing your habits is never easy. Commit yourself to these rules and consciously try to change your behavior. Before you know it, they’ll become second nature.

Rule #1: Provide a 20% down payment on large purchases

When it comes to big ticket items, such as cars, homes, furniture, boats, etc., save up so you’ll be able to put down a minimum 20% down payment. This will instantly give you equity in the item and will protect you in case of an emergency. A down payment of about 20% also means you will likely receive lower interest rates, which will help you save in the long run.

Rule #2: Establish a structured savings program

Develop an automated system to help you save. Work with your bank, employer or financial advisor to set up bi-weekly or monthly automatic deposits into a savings account. By automating this process you will not be tempted to spend the money instead of saving it. If you are planning to purchase a large item allocate a certain amount of your monthly savings toward that purchase. If, for example, you are saving to buy a new car, and you automatically transfer $100 into your saving account every two weeks, allocate $20 towards your car fund.

Rule #3: Maximize your retirement contributions

If you are not contributing the maximum amount towards your retirement savings plan, then you are missing out on a lot of money. Many Americans are not stretching to maximize their contributions when they can. What’s worse, they tend to rely on “guesswork” when setting contribution levels, and don’t fully understand the importance and long-term impact of small increases in contribution rates. Educate yourself about your 401(k) or IRA, and make sure you are reaping all the benefits.

Rule #4: Pay off your credit card debt within 90 days

Most people have at least one, if not two, credit cards that are used on an ongoing basis. While this is ok, it’s important to stay on top of the debt and not allow it to get out of control. To avoid interest payments it’s best to pay off your card immediately. If this isn’t feasible, establish a program that will allow you to pay off all the debt within 90 days. If you are not able to do this, you are likely living beyond your means and should re-examine your spending habits.

Rule #5: Be smart when it comes to taking out loans

It’s inevitable that at some point in your life you will have to take out a loan. When you do take out a loan, keep in mind that the more you borrow, the more interest you will be charged. You should only borrow the minimum you need in order to keep the interest charges down. In addition, the longer the repayment period, the larger your interest bill, so try to keep the term of your loan as short as possible, while keeping your monthly payments affordable. Most importantly, match your loan terms with the item you are purchasing. For example, don’t take out a six-year loan on a used car with more than 50,000 miles on it. That’s when many people get in trouble, since the chances are high that the car won’t be working for 6 more years.

Rule #6: Set a monthly budget and stick to it

One of the most important things you can do when it comes to your personal finances is to set a monthly budget. By consistently tracking your income and expenditures you will become astutely aware of your spending habits, making it much easier to manage your money. While this takes some discipline in the beginning, it will be well worth it. Consider using online tools such as Mint to help you.

The road to financial freedom isn’t as difficult as you may think. However, the willingness to put in the effort and do something is vital.

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Doug Benjamin

About the author

Doug Benjamin is Senior Vice President at MidWestOne Bank. He works in the retail department, specializing in checking and savings accounts, consumer loans, auto loans and home equity loans.

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