I’m a Financial Advisor: 5 Core Rules for Managing Money Wisely
There’s no single, one-size-fits-all approach to managing money because so much depends on factors like your income, expenses, family size, location and lifestyle preference.
But there are some general guidelines that work for just about everyone.
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Here are five core rules for managing money wisely, according to financial experts.
1. Build Up Your Cash Reserves
One of the most important money management rules is to make sure you have enough available cash to cover essential expenses in case of a financial emergency or sudden drop in income. Most financial advisors recommend building an emergency fund that covers at least three to six months’ worth of expenses.
The important thing is to prioritize liquidity over “ambition,” according to Ethan Aiem, CEO of Klendify, a provider of business funding solutions and financial guidance.
“Many people want to make big investments or aggressively scale their businesses before they have a readily available cushion,” he said. “If and when unexpected turbulence hits, that rarely ends well. [People] who withstand financial shocks and continue moving forward long-term are those who haven't committed every available resource.”
2. Lean Into Passive Stock Investments
Unless you’re a professional stock trader, you should put your money into investments with a proven track record rather than those with high potential rewards – and risks.
It’s hard enough for professional investors to beat the market, but much more difficult for amateurs, said Dr. Robert Johnson, chartered financial analyst (CFA) and CEO of Economic Index Associates.
“My advice to young investors is to simply invest in broadly diversified, low-fee exchange-traded funds that track indices like the S&P 500,” Johnson said.
He cited data showing that since 1926, the average annual return on a large-cap stock is 10.4%.
“If these historical average returns hold in the future, an investor would double their money in slightly over seven years and have 10 times their original investment in 23 years,” Johnson said. “Passive index investing has another big advantage, and that is it minimizes costs.”
3. Prioritize Margins – Not Just Income
There’s nothing wrong with aiming to earn a good living. But no matter how much you earn, it won’t do much good if you spend it at a rate that prevents you from building long-term wealth.
“The strongest predictor of financial stability I've come across has been far less about how much you make and more about the spread between what you make and what you spend,” Aiem said. “Keep that margin alive and you stay financially resilient, even on an average income. Lose that margin and even a high earner can become financially fragile.”
4. Be Smart and Focused With Debt
It’s almost impossible to avoid going into debt. But you can (and should) avoid the kind of debt that puts you in a financial hole without helping you attain financial security.
“Debt works when it’s attached to a clear, tangible outcome: growth, consolidation or asset building,” Aiem said. “It falls apart when it begins to fill the gaps of deteriorating cash flow.”
5. Be Patient as an Investor
As Johnson noted, investing is a “marathon and not a sprint.” Like any investor, you’ll see plenty of ups and downs over the years. The main thing is not to panic by selling investments that suddenly turn south, or by investing more money than you should during bull markets.
“Consistency and patience are the virtues associated with accumulating wealth over the long run,” Johnson said. “Accumulating wealth over the long term is really not difficult strategically. Dollar cost average into a broadly diversified stock fund and invest whether the market is up, down or sideways.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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