Keep these four laws of personal finance in mind when making any financial decision and you’ll set yourself up for success!
When trying to reach financial independence, you can save every penny you possibly can, or you can not worry about your daily latte spending while you focus on the big three expenses. There are lots of different ways to set up a budget, track your investments, or plan your retirement withdrawal strategy. You can invest in rental real estate or set up other lines of passive income.
No matter how you set up your journey to financial independence, I believe there are four main laws you need to always keep at the forefront of your mind. These rules are general in nature; this allows you to adjust and apply them to your own unique circumstances. This isn’t a specific strategy – you should apply these four laws no matter what budgeting, investing, or saving strategy you choose to follow. If you apply all four laws, I have no doubt you’ll be successful in reaching your goals!
The laws are simply:
- Streamline your expenses
- Expand your income
- Put every dollar to its best use
- Financial independence is the goal, early retirement is optional… FI(RE)
Those seem simple to understand but let’s dive deeper so you can see just how important each is to your success, and maybe uncover some benefits you might overlook on the surface.
Streamline Your Expenses
I chose the wording very carefully for this law. It’s not “minimize your expenses” or “track every expense in a spreadsheet”. It’s “streamline your expenses”. Your expenses should be simple. Simple to the point where you should almost be able to rattle off the top of your head what you spend money on each month.
By streamlining your expenses, it makes it easier to track each month. The less time it takes to track your expenses, the more likely it is that you’ll stick with good spending habits.
Streamlining your expenses also makes it very easy to spot unnecessary expenses. As an example, if you have twenty different subscriptions that are auto charged to four different credit cards it will be very difficult to figure out which subscriptions are worth keeping and which should be cancelled. Why? Because it’s hard to cancel a subscription that you don’t remember you are paying for! What if you had twenty subscriptions all being charged to the same credit card. It would still be a lot to keep up with but at least you could see it all in one spot. That would be a start to streamlining your expenses.
Ways to streamline your expenses:
- Put all expenses on one credit card*.
- Review your credit card statement to see if there were charges that were unnecessary and think about how those charges can be limited or eliminated going forward.
- Set up your mandatory monthly expenses (mortgage, insurance, etc.) for autopay so you don’t have to think about it and don’t have to worry about missed payments or late fees.
- Combine services when it makes sense. Instead of having separate lawn mowing, lawn fertilizer, and pest control companies, see if you can find one company that does it all. You just replaced three different bills with three different due dates every month with one bill.
Streamlining your expenses will naturally keep costs in check without too much effort. It also cuts down on the “head clutter” when your finances feel like they are out of control.
Expand Your Income
Expanding your income is the yin to streamline your expenses’ yang. Just like the first law, we kept this one simple and general in nature. It’s up to you how you expand your income. There are numerous ways to do it.
Some strategies:
- Apply yourself in your current line of business. Increase income by gaining expertise, attending networking events, exploring new niches, or closing more deals.
- If your profession involves a specialized skill, carpentry for example, could you add freelance work during your evenings or weekends?
- Add lines of income that are related to your current business. Maybe there are products you could offer that complement the ones you currently sell. If you power wash patios, maybe you can add window cleaning services. If you do tile work, could you offer grout or tile sealing services after the work is done? This could also lead to recurring business as the tiles need to be resealed every few years.
- Add a side hustle. This is a part-time job you do outside of your main work. It could be worth it even if it only brings in a few hundred dollars a month. You could do the “pre-made” side hustles like Uber, Doordash or Instacart. Or you could start your very own company out of your garage. There are plenty of examples of people whose side hustle ended up being more profitable than their full-time job!
- Make smart investment decisions. Increasing dividend and interest payments are also a form of expanding your income.
You could just focus on one of the two laws discussed so far and be fine. Keeping your expenses in line could give you a positive cash flow. Or increasing your income could also give you a positive cash flow. But doing both will maximize your cash flow. What do you do with that extra cash flow?
Well, that’s law number three.
Put Every Dollar to its Best Use
If you follow the first two laws, you’ll have an increasing gap between your income and your expenses. That’s called positive cash flow and the bigger the gap, the better! It’s important to put that extra cash to work for you in the most effective way.
You could simply put the extra money each month towards your mortgage but is that the best use of your money? Is paying off a 3% debt better than investing in a Vanguard index fund that averages 8% a year? The answer is no. It’s not the best use of each dollar. You might hate having debt but your emotions don’t change math.
Some more obvious examples:
- Paying interest on credit card debt. Paying 20% interest on a credit card balance is one of the worst money mistakes you can make. Credit cards should be paid in full each month or you could be throwing hundreds of dollars away each month!
- Paying full price for a new car when you can pay 30% less for a gently-used two-year-old car. Let’s say that difference is $10,000… could you not think of better uses for $10,000? How about this:
“You make a car purchase every 8 years and save $10,000 each time buying a gently used car. The investments earn an 8% annual return. That money would turn into $200,000 over a thirty-year period – at a 5% withdrawal rate, you would receive an additional $10,000 every year in retirement income just by saving $10,000 every eight years on your car purchases.”
“Being smart with your money” is a similar way of saying “put each dollar to its best use” but the wording of the latter is a constant reminder that each dollar counts. You might think you’re being smart paying off your mortgage but if you think of it in terms of “is this the best use of my money?”, it might get you to re-think certain actions you have automatically assumed are smart money moves.”
Finally, we have:
Financial independence is the goal, early retirement is optional
While the first three laws should absolutely be put into practice, the fourth law acts more as a reminder of what your end goal should be: financial independence. Financial independence is reached when your passive income streams are more than your expenses. Active work is optional at that point. Whether you want to retire early, drop hours to part-time, or work until you die, financial independence will make it possible to have the choice.
I know you’ve seen tons of articles on FIRE – financial independence, retire early – but I like to write it as FI(RE). Your goal is financial independence; retiring early is optional. It’s up to you what you do with your time once you reach financial independence.
“FI(RE) – Financial independence is the goal, retiring early is purely optional”
I hope these easy laws of personal finance give you a framework for your own financial independence journey. I wanted to keep them general enough that every person can apply them to their own situation and easy enough to remember that you can constantly remind yourself of your goals and priorities.
*I’m assuming you pay off your credit card each month. If so, using a credit card is far safer than using a debit card if your information is ever compromised. Rewards points are awesome, too. If you can’t handle credit cards (you spend more than you should and leave a balance on it), then stay far away from credit cards and continue using cash or your debit card.