Money rules are a framework that will either lead to your financial freedom or your enslavement by debt, worry, and fear. Think of these rules like river banks that channel the water in a specific direction. Without the banks, the water has no direction and might as well just be a puddle or swamp.
This idea was introduced to me in a seminar I took many years ago after I had already created a life of Complete Financial Choice®. The point is to determine in advance how you will spend and/or grow your money and wealth.
I encourage you to establish the money rules that will work for you. You are free to choose any of my rules for yourself or makeup others that will serve you to create Complete Financial Choice® for yourself.
Rule #1 – Pay Yourself First.
I speak about this often, but not as one of my money rules. Again, this was one of the unconscious ones before the seminar. It is a concept that has worked for 5000 years and will still be working when you and I are dust.
Treat yourself like you matter by paying yourself first at least ten percent of every dollar that comes into your life. This is the money that you will set aside to KEEP for the rest of your life.
You will only use this money to make investments that will generate an income. This will be passive income so your money is working for you, instead of you working for money.
Rule #2 – Seek the Advice of a Specialist.
Seek the advice of a specialist before making an investment in an area where you are not familiar. I cannot (actually I can) tell you how many hundreds of thousands of dollars I lost before I had this rule in place.
Whether I am looking at an investment in a cannabis company, an angel investment, or a stock, I have experts who will counsel me. Since I put that rule into place it has saved me hundreds of thousands of dollars.
Rule #3 – No Consumer Debt.
I hated having credit card balances and making payments. When the income from my investments was enough to cover my standard of living and I was able to pay off my credit card balances in full every month that became one of my unconscious money rules. After the seminar I mentioned earlier, it became a conscious money rule.
While it is not at the top of my list, it is a rule that I will not violate. I never charge anything that cannot be paid in full when the statement arrives. Any credit card charges are paid in full when the bill arrives, not just prior to the due date. I will not carry any balance from month to month.
When I was broke and struggling, I was not able to do this. It caused so much anguish and heartache to send in a minimum payment and have that consumer debt hanging over my head.
This is NOT the same as investment debt. I owe millions of dollars of investment debt, but the investments generate the income to make the payments. And there is plenty of money left over to support our lifestyle.
Rule #4 – Limit your Risk.
When I am testing out an investment, like investing with a new real estate syndicator for the first time, I limit my investment to $50,000. If I lose it, I will be sad, but I will not be devastated.
Never invest/risk what you cannot afford to lose.
With this rule in place, there was only one time where the investment looked like it would not work out. I quickly requested a return of my money, and it was paid back. Based on how the syndicator handled his communication with me I would not work again with that person.
Rule #5 – Have Adequate Reserves.
Being an insecure person having adequate reserves provides a level of security when and if things go wrong. When I was struggling, this was not available and created so much stress.
If I had the knowledge I gained as I matured, and avoided the wrong marriage partners, I could have ended the struggle sooner. But later is better than never.
Depending on your income, three months of your bills as a reserve account could be enough. For us, we overdo it with two years of cash in checking and savings that would maintain our lifestyle with no adjustments.
If we eliminated some unnecessary expenses, or deferred some expenses, or cut out vacations, we could probably stretch those funds to last four years. This is based on receiving no income from any of our investments or investment properties and not liquidating anything.
Rule #6 – Do Not Lend Money to Friends or Family.
I’ve made the mistake more than once before I learned my lesson. If a relative or friend needs to borrow money from me because they cannot get it from a bank, they are probably not a good credit risk.
It is better to teach them how to handle money effectively than to lend them money. Think of the expression, “If you give someone a fish they eat for a day. If you teach them how to fish they can eat for a lifetime.”
Offer to buy them a copy of my book, Wealth On Any Income. It covers everything someone needs to know to handle money powerfully, get out of debt and create wealth, both from an emotional perspective and the tips and techniques. It can be purchased here: Books – Wealth on Any Income.
Even when the person is a good credit risk, it still creates problems. When I want to refinance a property for the lower rates I have to explain to the lender how I don’t have to make the payments on a triplex I don’t own.
Or I have to explain how I don’t have to make the payments on a $250,000 Porsche I don’t own. I have to get twelve months of bank statements to show that someone else is making those payments. It makes improving our financial situation more complicated.
Rule #7 – Think it Over For a Day.
When it comes to a large purchase, and even sometimes a small purchase, I like to think it over for a day, or longer, before I pull the trigger and spend my money.
As an example, since I was a teenager I have wanted a Triumph Bonneville motorcycle. My primary motorcycle is a Honda Goldwing.
First, my wife and I agreed that I had to clear space in the garage if I was going to get a second motorcycle. Then I thought it over for about three months before I finally decided I would buy one.
I also decided I would buy a used one instead of a new one. Why spend $13,000 on a toy when I could spend $7,000 on the same toy that someone else purchased and realized it was a mistake?
As it turns out, I purchased it, kept it for two years, hardly ever used it, and sold it for $6,000.
Here is another – I thought it would be cool to have a Go Pro to use like a dash camera. At $300-400, I needed to think it over for a while. After about two months I found that I could buy an actual dash camera for $29 that would do what I wanted. I thought that over for about three days and purchased it, and I am happy with the product.
If you want to create wealth and handle your money more powerfully, then take my advice; pick a dollar amount that will have you think over your purchase for at least 24 hours. Maybe it will be $10, $100, maybe it will be $1000, just pick what will support you.
Rule #8 – Live Within 80% of your Income.
This rule also ties into Rule #1 – Pay yourself first. When you are building your wealth and your passive income, it is vital to live on only 80% of your income.
You will pay yourself the first 10% of every dollar that comes into your life, from work, commissions, bonuses, royalty income, whatever. This you will keep for the rest of your life.
You will also set aside 10% (for some people it might need to be 15%) for the expenses that only show up once or twice a year, like auto registration, car maintenance, back-to-school clothing, holiday gifts, whatever. This is money you will spend later.
You can do whatever you want with the other 80%; buy groceries, eat out, pay the rent or mortgage, utilities, taxes, make car payments, etc.
I discovered that for things to work out for my situation I needed to set aside a total of 26%. This covered 10% for me to keep forever; 5% to spend later on unexpected or unplanned expenses, and 19% for income taxes.
Rule #9 – Limit your Distribution Percentage.
Even though I am 73, and my wife is 67, we have not started to live entirely from our investments. We are still working, but we are working by choice, not because we have to.
My son, who is a Chartered Financial Analyst® (CFA®) and Certified Financial Planner® (CFP®), tells me that the safest drawdown rate, or distribution percentage, is 4%. None of our investments has that low of a return.
My son is very conservative and handles hundreds of millions of dollars of client investments. As a fiduciary, safety is one of the highest priorities for his clients. He does not agree with my approach to risk and tells me that now that we have created wealth we should do more to protect it than to continue to grow it.
The point is that you must decide for yourself what your comfort level is with risk, with a distribution rate, with carrying debt, and so on. Establish the money rules that will work for you.
What are the money rules you will adopt, or set up for yourself?
To Your Prosperity,