Decoding all the financial wisdom you have ever heard
We have all heard the sage financial sound-bytes that seem so powerful and useful. But what do they really mean and how can they be used in everyday life? Decoding the true meaning of some of the tried and true financial sayings can be very helpful to your financial situation. Applying these thoughts will produce positive results.
Let’s start with the one that we hear most often – Pay yourself first.
It doesn’t mean give yourself spending money first. In fact, it is just the opposite, pay yourself first really should be save first, spend last. To follow this advice means that before spending any money from your paycheck, you first make automatic deposits to savings, 401k, and other savings accounts. After those deposits, you then pay your bills which leaves your spending money for the month.
This is another one that is heard often - Don’t live beyond your means.
This one can be a little more difficult to understand as there are at least two ways to use this advice. The first is simple, which is don’t spend more than you make and to make all purchases with cash. This type of purchasing behavior will ensure that you don’t ever overextend yourself, but it can be difficult following this advice when you need high priced purchases.
What is another way to interpret this financial advice?
Most people who have been working for a few years have access to credit. This gives them the “means” to do a lot of living with this additional influx of funds. In this situation, the guidance is more about using our expanded means, credit, wisely and responsibly. For example, use credit to buy a house or car, but don’t finance concert tickets or your wardrobe with credit.
Why can’t we put all of our eggs in one basket?
This tip is most commonly used in connection with your investments such as your 401k allocations or other investments such as stocks, mutual funds or bonds. Perhaps a more meaningful word is diversification which means splitting your portfolio between different types of investments and risk categories. Putting the funds in your portfolio into several types of investments helps avoid large losses as not every sector does well or bad at the same time.
What about this one – Manage your money, don’t let it manage you.
Yes, this is a favorite of all financial experts who talk about managing your money. Basically, until you discover how to budget and then stick to that budget you will have to make life decisions on how much money you have left each month. If you are managing your money, your decisions about life are not controlled by how much money you have remaining.
This is one that is always interesting - A penny saved is a penny earned…
This quote can have a couple of different interpretations but one that might make sense is not really related to how much we put in savings but rather on how we spend our money. If we focus on only buying what we need and not what we want, use coupons and discounts as often as we can, and wait for things to go on sale before buying them, we can save a lot of money. And if you save money by spending less on the things that you buy, it can have the same financial impact as earning more money at work.