What’s the #1 Personal Finance Rule?

As the economy continues in its recession, I am actually asked this question quite a lot:

What is the #1 rule of personal finance?

The answer, as some of you might imagine, is not particlularly deep or earth-shatteringly insightful:

Spend less than you earn (or earn more than you spend).

This basic credo is, in fact, the basis for all good personal finance decisions. It is the foundation of making the right choices down the line, and the catalyst that helps people learn to prioritize their spending. This rule is expressed in two different ways:

1. Limiting your expenses so that they do not exceed your income.
2. Increasing your income so that you can cover your expenses.

In both cases, though, the basic principle is the same: If you don’t have the money, don’t spend it. While this rule is getting more attention now — since people are being forced by economic realities to look at their spending habits — it is an important rule even during the good times. In fact, following the #1 personal finance rule during the good times can help you into a position that can shield you from the worst effects of the down times.

image source: sxc.hu