We’re human. We develop habits in all areas of our lives. These habits have a direct impact on the results we experience. If, for instance, we go to gym regularly and eat nutritious food, then it is likely that we will be relatively healthy. The same applies to our finances. How we behave with our money will lead to our financial circumstances. If we feverishly spend money we don’t have on things we can’t afford by continuously whipping out our credit cards, then it is likely we will become increasingly over-indebted and eventually seek out the services of a debt counsellor.

By learning the 10 rules of financial management we are likely to avoid the above situation and lead a life of financial wellbeing.

1. Have realistic expectations

   Nothing that you can do today is going to change your finances today, but each financial decision you make can make a small difference to your finances. Make enough correct decisions and you see a big difference to your financial situation. It is important to have a clear picture of what you want to achieve financially and then to stick to these goals. Similar to a successful weight loss program, you need to start out by writing down your goals and then to take action every day in order to achieve those goals.

2. Live within your means

   You need to live below your means as doing so is the most important way to generate wealth. It stands to reason that if you’re spending all the money you make you're not making any of your money work for you. Most people don’t understand this. The average South African spends 73.8 percent of his or her income on debt repayments. That’s over 73 percent just on servicing debt! After that, he or she needs to spend money on consumables like groceries, insurance, petrol, security, etc. Guess what is left at the end of the month? Nothing! What am I suggesting when I say you should 'live within your means'? Curb your expenditure to less than 80 percent of your income. That way you can use the other 20 percent or more to pay off your debt followed by saving and investing to build your wealth.

3. Stay out of credit card debt

   The main problems with credit card debt are:

   • If you can afford something, buy it using cash. If you have to use your credit card, you’re spending money you don’t have. This is called debt and, as you know, debt inhibits your ability to build wealth.

   • The interest rates on credit cards are very high, usually five to 12 percent above prime. This makes credit card debt very expensive.

   • Many people who have a high outstanding balance on their credit card simply feel that it is hopeless trying to pay it off. They don't try hard enough to get it to zero, sending the outstanding balance even higher.

     Once you get into credit card debt you fall further and further behind because, in addition to paying your current expenditure, you’re paying for the previous expenditure you owe on your credit card.

   We recommend that you:

   • Reduce your outstanding balance of your credit card by paying off more than your minimum instalment and more than you purchase monthly on your credit card. Any additional money that you can pay to reduce your credit card's outstanding balance is money well spent.

   • Once you reduce your outstanding balance call your credit card company and have them reduce your credit limit, forcing you not to overspend on your credit card in the future.

   • Don’t lose sight of the bigger picture and don’t become discouraged. Always remember that, with willpower and concerted effort, you can get your outstanding balance on your credit card down, leading to peace of mind in the medium to longer term.

4. Maintain a spotless credit record

   Your credit record contains all the information that your creditors are maintaining while you make good (or not) on all the financial obligations you enter into. As such, it is your financial reputation. It is also a strong indicator of your financial habits. If your credit record is tainted with negative reports, it tells us that you don’t have very good financial habits that could be a symptom of a larger behavioural problem. Make sure that you maintain a spotless credit record as this will lead to lower interest rates and creditors wanting to do business with you. It’s worth the effort.

5. Rationalize your spending

   You may really want that new car, cell phone or latest gadget. It tells others that you’ve arrived, doesn’t it? You will be the envy of all your friends. This is the consumerist culture we live in and we are the apple of every good marketer’s eye.

   The truth is that you don’t have to have the latest car, cell phone or iPod. You can do without it, at least until you can afford to pay for it in cash, or you can buy it out of savings you have created by spending your money wisely and then saving and investing the balance.

6. Understanding opportunity costs

   Opportunity cost is defined as the cost of pursuing one opportunity over another. For example, if you are considering buying a bicycle which costs R1000 the opportunity cost would be defined as the lost opportunity of doing something else with this money like investing it in a 32-day notice savings account. If you buy the bicycle, then in a year’s time it may be worth R250. If, however, you had taken this money and invested it in a savings account at seven percent it would be worth R1070 after a year. The difference between the first option and the second option is R820 (R1070 less R250) — the opportunity cost of not buying the bicycle.

7. Understanding the time value of money

   This is the most basic law of money. The time value of money law states that a rand today is worth more than a rand in the future. Let’s give you an example.

   Suppose you invest R1000 in a savings account today at a seven percent interest rate. In a year’s time, your investment will be worth R1070. Therefore, if you can choose to have R1000 today or R1000 in one year’s time you would always want it today instead of sometime in the future.

   Now let’s look at the reverse of this, to see how the time value of money can work against you. Suppose instead of receiving R1000 that you spent R10000 by buying something on your credit card. Remember that a rand today is worth more than a rand tomorrow, so in this case, you will have lost money because you will need to pay off your credit card using money from the future (which is worth less than money today). In addition to having to pay with future money, you will also have to pay the interest expense. So, in this case, if you paid off the credit card in one year (assuming 20 percent interest), you’d have to pay R1200.

   You should think about the time value of money in your financial decision making.

8. Understanding the compound effect of money

   The compound effect of money is the most important law of finance and the one most likely to make a huge difference toward growing your long-term wealth.

   Suppose you invest R1000 in a savings account at an annual return of seven percent. In one year's time your investment will be worth R1070 (R1000 + (R1000 x seven percent)), effectively yielding a R70 gain. However, at the end of year two, the same initial investment is worth R1144.90 (R1000 + (R1000 x seven percent) + (R1070 x seven percent), yielding a R74.90 gain. In the third year the same initial investment would be worth R1225.04, yielding a gain of R80.14. By the tenth year the initial investment would be worth R1967.15 and by year 25 it would be worth R5427.43.

   From looking at this example, you can see that investing R1000 today reaps more reward than investing R1000 in a few years' time. In order to build wealth, you need to utilize the benefits of the time value of money and the compound effect of money.

9. Take appropriate risks

   If you want to make money, you will need to take some risks. But how much risk should you be taking? You’ve heard that the higher the risk the higher the reward. Does that mean you should be taking the most risk possible?

   The answer to this question is that you need to be taking the risks that are appropriate to you. This will depend on two things, namely your time horizon and your aversion to risk. Your time horizon means the time frame that you will require the money to be available in. If you are close to retirement you will typically have a short time horizon as you will require access to your investments shortly. You will also typically have a strong aversion to risk and will want to be in less risky investments.

   If you are young and 40 years away from retirement, you should probably be investing in more risky investment products as you don’t need the money any time soon and can afford to take some risks that could produce a high return payoff.

10. Save money

    You’ve heard the saying, 'A penny saved is a penny earned'. This is very true. To build wealth you need to start saving. You can do this in many ways. Find every way possible. One way of saving is to forego a purchase today that you can put off until tomorrow or next year or in five years' time. The point is this — you need to start saving today.