If I'm being honest, I worry about money all the time.
Maybe not all the time. But I started thinking about making a living at the age of 16. Because I'm not coming from riches, I constantly worry about not having enough.
The sense of insecurity eases off as my income grows. However, I still fall into the deep hole of "not-enough-ness" and "what-ifs" once in a while.
My wife didn't like it when I did that. Me either.
So I came up with a list of money rules to stop worrying about money.
If you're into personal finance and have read a few articles about money, the first rule is always to live below your means.
It's math. If you spend less than you make, you will never get into trouble (and debts).
You do that by keeping your monthly expenses below your monthly income.
Conservatively, my monthly expenses include both obligations and true expenses. True expenses are the things that I know I'll be spending but not paying monthly, such as insurance payments and car repairs. It's a concept I learned from YNAB. You can learn more about it from my personal finance guide.
As for (most) big purchases, I'll plan and save for it upfront. In short, other than houses, I pretty much go by the rule of no cash, no spending.
Sticking to the first rule also means being flexible. If my income goes down, my spending needs to go down too.
This second rule is an extension of the first rule.
Spending $990 when you make $1,000 is good but not great. While we can plan and estimate our monthly expenses, we can't predict future circumstances (more on that later).
Imagine if your income gets cut by half because of an unforeseen event. If you're making $1,000 but spending $500, that wouldn't affect your life as much.
Not only do we want to avoid getting into trouble, but we also want to plan and work toward a better future. Increasing the gap between your expenses and income—also known as saving rate—allows you to do that.
For one, it helps me keep my lifestyle costs in check. Next, it pushes me to make more to hit a particular saving target.
Your target saving rate is entirely up to you. The Richest Man in Babylon recommends saving 1/10 of your income. But I believe everyone should aim for at least 20%.
Personally, I aim to keep my saving rate at 30% to 50%. I don't intentionally push my saving rate beyond 50%. I only see myself getting to a 50% saving rate when I get an unexpected income that skews the expense-to-income ratio.
Now back to our inability to predict the future. To ensure we're not financially ruined by unexpected events, it's good to always have at least six months' worth of expenses saved up.
I call it the runway fund because it gives me the runway in case I lose my income.
Depending on the career stage you're in and the net worth you have, you can adjust your runway fund target accordingly.
If you're just getting started, aim to save up three months' worth of expenses as your runway fund and invest everything beyond that, so you're not holding too much cash.
You can always add more to your runway fund after working and investing for a few years. If you're running a business or have family members who depend on you, you might want to go for a 12-month runway fund.
I learned that the runway fund changes from time to time because our expenses do over time. So it's essential to keep in mind to review it at least once a year.
Having a single source of income creates a single point of failure known in computing.
Say you have six months worth of expenses saved up. With only one income stream, you will be able to survive for six months before you run out of money.
Now imagine two income streams with an equal amount (for easy calculation). If you lose one of the two income streams, your runway fund will last you 12 months.
Having multiple income streams is one of the best ways to mitigate the potential risk of losing all of your income. And the more income streams you have, the less risky you are. Combining with:
You pretty much remove 95% of all financial threats imaginable—except for non-financial black swan events like accidents, health issues, and war.
But you and I both know that stopping the worry about money is more than removing risks. There's no shortage of people who make a fortune but still worry about money.
More often than not, it's psychological.
"What if I lose all of my money, my job, and my business?" I used to ask my wife occasionally—out of the blue.
It pissed her off every time I asked that.
I then continued, "Our lives will be over," and went on with how we won't be able to maintain the lifestyle we have, provide for our family, and achieve our goals and dreams.
In hindsight, it shows how I was attached to my lifestyle—trying to control what I can't control. If I dig deeper: the paranoid me trying to hold on to the stuff I've gotten over the years instead of cherishing the skills and abilities that I've earned through learning and work.
My wife's answer to my question is simple: "Go get another job or start another business then. You've done it more than once; you can do it again."
In short, get back to work.
It was a relief for me when I heard it. And I hope it does the same for you.
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