Becoming good with your money is essential to achieving financial independence. First and foremost, you need to learn the money rules. This article will address 12 important money rules you should always aim to observe.

MONEY RULE #1: MONEY IS A TOOL

The first of the money rules is to realize that money is just a tool.

We need money for a lot of things. We use it regularly to buy lunch, pay for parking or commuting expenses, buy groceries, make mortgage payments or pay rent, cover medical bills, buy clothes, etc. The list of what we need money for is endless. Money touches all aspects of our lives, both vain and noble. Even charity work requires money in one way or another.

Because money touches everything and everyone, the view that money is evil is flawed. This view creates a scarcity mindset. It also causes money-related topics to be avoided and even neglected. The truth is that money can be used to do good or to do evil. It just depends on how it is used as a tool.

Money is simply a tool to help you live your best possible life, filled with healthy relationships and memorable experiences.

MONEY RULE #2: DON’T SPEND MORE THAN YOU EARN

We live in a materialistic world where opportunities to spend are at every turn. There are advertisements anywhere the eye can see. There are commercials right from subway turnstiles to every social media platform. Today, we are exposed to an average of more than 5,000 ads per day, both offline and online.

On top of all that, how to spend has become incredibly easy. Companies now provide 1-click ordering and, pre-approved credit cards are delivered directly to our mailboxes. It is no wonder that many people in our modern society are highly indebted, living paycheque to paycheque.

However, the basic truth that stands the test of time is that you must live below your means to get ahead financially. This allows you to avoid carrying financial burdens of the past and instead, provide for the present and future needs. Living below your means further allows you to have a peace of mind, carry less stress, and build your wealth for the future.

MONEY RULE #3: BUILD A BUFFER (HAVE AN EMERGENCY FUND)

A buffer or emergency fund is money put aside to cover any unexpected expenses. This acts as a financial safety net in case of an emergency. Emergencies could include unexpected loss of employment, major home or car repairs, etc.

Firstly, having an emergency fund gives you a significant level of freedom to live a more calm and relaxed life. This allows you the luxury of not rushing into quick decisions. For instance, in case of a sudden loss of employment, you could take your time to find the right next opportunity. Without an emergency fund, you may have to take a less than ideal job to cover immediate expenses.

Secondly, an emergency fund will help you avoid getting into high-interest debt and/or dipping into your long-term savings and investments. All these would set you back financially but can be easily avoided by adhering to this rule of money.

MONEY RULE #4: PAY YOURSELF FIRST

Paying yourself first is a saving strategy. It means saving a portion of your income as soon as you get paid, before paying bills or any other spending. As discussed earlier, spending is so tempting and easy to do. Saving on the other hand comes less naturally to most people. It requires discipline and results in very delayed gratification. As such, we are much less inclined to save as we are to spend. Paying yourself first creates a kind of forced discipline to save.

First, you need a budget to determine how much to pay yourself. Learn how to create a personal budget here. Second, you should consider automating your savings to make sure that there is no opportunity to “cheat.” Pre-authorized rerouting of your funds can be done automatically through your bank. These funds can be directed into savings accounts, emergency funds, retirement savings plans, etc.

MONEY RULE #5: SAVINGS WILL NEVER MAKE YOU WEALTHY

As discussed earlier, savings provide you with a financial safety net. It is important to have enough savings as you need them in case of emergencies and for a peace of mind generally. However, savings alone will not make you wealthy. This simply because savings do not grow at a high enough rate to create wealth.

Most savings accounts provide low-interest rates that cannot keep up with the rate of inflation. If your savings are not growing at the same rate as inflation, it means your money is losing its value and your purchasing power is decreasing.

Therefore, you need to grow your money by investing in vehicles such as stocks, bonds, and real estate provided by various brokerage firms such as TD Direct Investing. Learn more about the stock market for beginners here.

MONEY RULE #6: INVEST IN WHAT YOU KNOW

A basic understanding of what you put your money into is a must. Even if you pay a financial advisor to pick your investments, you still need a general understanding of where your hard-earned money is allocated. Not understanding your investments would equate to gambling.

Should you invest in individual stocks, you need to understand the business of the issuing companies and their financial standing. If you invest in real estate, you need to understand the overall real estate market and trends. Never invest blindly.

Index funds are a smart choice for beginner investors or people with a little investing knowledge. This is because they aim to mirror a particular market index such as the S&P 500. An index fund contains small pieces of the companies included in the particular market index. Buying an index fund is like buying a small piece of the entire market. As such, you do not need to research all the individual companies in the market. Additionally, index funds carry relatively low-risk since they are inherently diversified.

Whichever investment vehicle you choose, be sure to have some understanding of it.

MONEY RULE #7: USE DEBT WISELY (GOOD DEBT VS. BAD DEBT)

While it is possible to live without debt, it may not be financially viable or even financially smart to do so. Most people cannot pay for a house or a university education in cash. As such, some level of debt is necessary to make such purchases.

Good debt is incurred to purchase something that appreciates in the future. For instance, houses tend to increase in value over time and education increases your long-term earnings potential. Therefore, a mortgage or a student loan could be considered good debt.

Bad debt is incurred to support one’s current lifestyle but it does not generate future income or wealth. For example, high-interest credit card debt and car loans can be considered bad debt. As a rule of thumb when purchasing depreciating assets, either buy in cash or go for a cheaper option.

Check out these related articles:

• Budgeting for Beginners + Free Budgeting Template
• Should you invest or pay off debt?

MONEY RULE #8: AVOID LIFESTYLE INFLATION

Lifestyle inflation or lifestyle creep happens when you increase your monthly spending as your income grows. This could happen when you transition from being a student to holding full-time employment. It could also happen you receive a bump in salary and bonuses.

It is important to acknowledge and celebrate the milestones. Equally important though, is allowing those milestones to make a meaningful difference in your life. Lifestyle creep becomes an issue when increased spending does not add value to your life.

To combat lifestyle inflation, create financial goals, and allocate any additional income toward achieving those goals. Also, consider substance over style before incurring additional expenses. For instance, does buying a more expensive car serve you any better than the car you currently have? If it does (for instance, by lowering maintenance costs) then the purchase is justified. Otherwise, it would be taking away from your long-term financial goals.

MONEY RULE #9: THE MORE YOU LEARN, THE MORE YOU EARN

The world is constantly changing. Consider how technology continues to disrupt various industries. Payment systems like Apple Pay or PayPal make carrying physical cash unnecessary. Ride-sharing services such as Uber or Lyft are taking significant market share away from traditional taxi companies. As such, we must keep up by continuously learning or we miss out on big opportunities. The more knowledge we have, the more value we bring to the table.

Further, the most successful people in the world are known to be voracious learners. Warren Buffett is known to read for at least 5 hours every day. Bill Gates reads a book each week. Oprah Winfrey is so obsessed with reading and runs the world-famous Oprah book club.

Continuous learning nourishes our minds, builds confidence, sparks new ideas, and gives us new perspectives. All these improve our value, and value increases earning potential.

MONEY RULE #10: WHERE ATTENTION FLOWS, MONEY FOLLOWS

The currency of any business is attention. A business needs to capture its customers’ attention before any sale takes place. Similarly, you need to capture an employer’s attention to land your dream job.  If you need capital to build a business, you need to get a lender’s or an investor’s attention.

The more you learn what the right kind of attention is and how to capture that attention, the more money that will come your way.

MONEY RULE #11: WEALTH ACCUMULATES OVER TIME

There are two key money rules to accumulate wealth.

The first is the length of time one has been consistently saving and investing. When you start investing is more important than how much you start with. This is because of the power of compounding, which means earning interest on the interest you receive. Over a long time, even a small investment can grow to a remarkable sum.

The second is that allocating more of your income to higher return investments to accelerate the effects of compounding. Consistently increasing your investments over time is more effective than inconsistent one-time large additions.

As such, the best way to accumulate wealth is to start as soon as you can and to stay disciplined about consistent investing.

MONEY RULE #12: MONEY WILL NOT MAKE YOU HAPPY OR SOLVE YOUR INSECURITIES

This is the most fundamental of all the money rules to observe.

While money does solve some problems and makes life easier, it will not make you happy. It will also not solve any insecurities that you may have. Money tends to amplify what is already within you. Improving people’s lives, meaningful relationships, shared experiences and meaningful work are some of the ingredients for a happy life.

Being aware of these money rules is the first step toward your financial independence. The next crucial step is to take action. The ball is in your court.

If you enjoyed this article on the 12 money rules or have any questions, please leave them in the comment section below! I’d love to hear from you! Also, please feel free to share this with anyone that may benefit from it as well.

“Formal education will make you a living; self-education will make you a fortune.” ~ Jim Rohn