Whether it’s the cost-of-living crisis, the economy or maybe just a few too many days until pay day – frankly, times are hard. This makes it an ideal time for some money management tips. Here are five golden rules of personal finance to help everyone through these tough times.
It’s a simple rule, but it's still the most potent piece of money wisdom: don’t spend more than you earn. Living within your means is a sure-fire way to stay out of debt, avoid creeping interest costs and create financial stability. Plus, the peace of mind that comes from knowing you can afford your lifestyle is priceless.
Rule 2 – Create an emergency fund
As the famous line goes 'Life is like a box of chocolates, you never know what you’re gonna get'. That means a crucial money move will always be to have a stash of cash for when emergencies strike. It’s a good idea to aim for 3–6 months of living costs, saved in an easy access, high-interest saving account. And remember to top up your emergency fund if your cost of living has increased and if you can afford to.
Usually, the interest you pay on debt is higher than the interest you gain from savings. So, you might be better off repaying expensive debt as a priority before sending money to savings (aside from your emergency fund).
Here’s an example:
- The average interest rate on a UK credit card is 26.11%. If you had £1,000 of debt at a rate of 26.11%, you'd pay £261 in interest over the year (assuming this was simple interest and you made no repayments)
- The average interest rate on a UK easy access savings account is 2.77%. If you saved £1,000 in a savings account at a rate of 2.77%, you'd earn £27 in interest over the year (assuming this was simple interest and you made no withdrawals)
Rule 4 – Create money goals
For many of us, we’ll eat as much food as we have on the plate. Similarly, we’ll often spend the money that we have in our accounts. To really be in control of your cash, it’s a good idea to set clear money goals before it even arrives in your account. That might mean determining how much you can afford to save, then setting up a standing order for the day you get paid. Or maybe setting a spend budget, with about 50% of cash going to ‘needs’, 30% to ‘wants’ and 20% to ‘savings and investments’.
Idle cash can be costly – in other words, money that’s not earning interest is actually losing value due to inflation. So, to make your money work for you, consider putting it in high-interest savings accounts or, if you are comfortable with the risk of losing money, potentially investment products. Over time, you’ll earn interest that compounds, allowing you to gain more interest on previous interest earned. With investments, any earnings over time can be reinvested to generate more dividends or returns, depending on the type of investment.
Looking for somewhere to keep your savings? Bank with Chase and you can open a saver account. Start saving with as little as you like, and we’ll calculate your interest daily and pay it monthly.
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Recommended reading
Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up, and you may get back less than you invest. The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products. Articles may reference products and services that Chase UK does not currently offer. This article is for information only and does not constitute financial advice.
FAQs
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. 50% for Needs: Allocate 50% of your income to cover essential needs such as rent/mortgage, utilities, groceries, transportation, and healthcare.
What are the 5 points of personal finance? ›
There's plenty to learn about personal financial topics, but breaking them down can help simplify things. To start expanding your financial literacy, consider these five areas: budgeting, building and improving credit, saving, borrowing and repaying debt, and investing.
What are the five golden rules for managing debt? ›
Master your money with 5 golden rules of personal finance
- It's a simple rule, but it's still the most potent piece of money wisdom: don't spend more than you earn. ...
- Rule 2 – Create an emergency fund.
- Rule 3 – Pay down debt as a priority. ...
- Rule 4 – Create money goals. ...
- Rule 5 – Make your money work for you. ...
- Recommended reading.
Here's a closer look at five commonly accepted rules of thumb regarding money, and how well they hold up in real life.
- The 50/30/20 Rule. ...
- The 20% Down Payment. ...
- The 6-Month Emergency Fund. ...
- The Million-Dollar Retirement. ...
- The “Age in Bonds” Rule.
#1 Don't Spend More Than You Make
When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.
What is the 80% rule personal finance? ›
The rule requires that you divide after-tax income into two categories: savings and everything else. As long as 20% of your income is used to pay yourself first, you're free to spend the remaining 80% on needs and wants. That's it; no expense categories, no tracking your individual dollars.
What are the 5 C's of finance? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are 5 personal finance strategies? ›
The five areas of personal finance are income, saving, spending, investing, and protection.
What are 7 steps in personal finance? ›
Financial Planning Steps – From Start To Finish
- Establish Clear Goals. ...
- Gather and Organize Financial Information. ...
- Analyzing Your Current Financial Situation. ...
- Develop a Comprehensive Financial Plan. ...
- Put Your Financial Plan into Action. ...
- Monitor Your Progress and Make Adjustments. ...
- Revise and Update Your Financial Plan Over Time.
The Debt Snowball: The Best Way to Get Out of Debt
- List all your debts from smallest to largest, ignoring the interest rates.
- Make minimum payments on all your debts, except the smallest—that's the one you'll attack. ...
- Once you pay off your smallest debt, take that payment and apply it to your next-smallest debt.
Key Takeaways
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How to get out of debt quickly? ›
The fastest ways to pay off debt
- Take advantage of debt relief services.
- Reduce interest where possible.
- Focus on your highest interest rate first.
- Take advantage of opportunities to earn extra income.
- Cut expenses where possible.
Rule 1: Never Lose Money
This might seem like a no-brainer because what investor sets out with the intention of losing their hard-earned cash? But, in fact, events can transpire that can cause an investor to forget this rule.
What is the golden rule of money? ›
Save up the money you need for your purchases instead of borrowing it. This will give you time to hunt for sales and you won't end up paying interest. Buy used cars, furniture, clothing, etc. New things lose value as soon as you take them out of the store—don't take the depreciation hit.
What does golden rule mean in finance? ›
The three Golden Rules of Accounting are- 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What are the three golden rules of finance? ›
The 3 golden rules of accounting are: Real Account - Debit what comes in, Credit what goes out. Personal Account - Debit the receiver, Credit the giver. Nominal Account - Debit all expenses Credit all income.
What is the 70 30 rule in personal finance? ›
The mistake most people make is assuming they must be out of debt before they start investing. In doing so, they miss out on the number one key to success in investing: TIME. The 70/30 Rule is simple: Live on 70% of your income, save 20%, and give 10% to your Church, or favorite charity.
What is the basic golden rule? ›
The most familiar version of the Golden Rule says, “Do unto others as you would have them do unto you.” Moral philosophy has barely taken notice of the golden rule in its own terms despite the rule's prominence in commonsense ethics.
