Personal finances is simply the management of your incoming cash versus your outgoing spending. Personal finances is more behavioral than mathematical. If a person is frugal and does not spend all that they make many do not need a budget if their income is enough to easily pay their bills. If someone lacks self control and can’t say no to their own desires for material things then no budget will stop them. The value you are getting paid to create in the world must exceed what you are consuming to be successful in personal finance.
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- You must have a source of income that is sufficient to meet your lifestyle goals. If you make less than you spend you have to increase your earnings or decrease your spending. There is no magic formal. You have to work on your drive and passion to say yes to more responsibilities that create more earning power or your self control around saying no to yourself when you want to spend money. What you need is different from what you want. The more passionate you are about how you make money the better you will likely be at earning it.
- You have to manage your money through a budget or self control. You have to spend your money on paper before the month begins or have the earnings power and self control to make it tracking unnecessary.
- You can be paid for different reasons. Some get paid for what they can do, others get paid for their knowledge, some get paid for sales, or managing people. Some sell their time, others their experience, people get paid for many different reasons and you have to find the best way for you to get paid.
- For most people owning a home is better than renting if your home has been recently built and is in a growing area. A home is a hedge against inflation and a mortgage locks in your monthly rate while rent can increase. A 15 year mortgage can get you half way through paying off your house in 7.5 years while a 30 year mortgage can feel like a life sentence to payments. Avoid houses in bad areas that are not growing. Be careful not to buy a money pit that needs major repairs soon after purchase. A house bought at the right time and the right place can help create wealth in home equity. This is one of the surest paths to six figures or more in gains for living somewhere which you have to do anyway.
- Do not buy new cars until you are a millionaire. According to current depreciation rates, the value of a new vehicle can drop by more than 20 percent after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose 10 percent of its value annually. When you buy a new car and drive it off the lot, the depreciation you experience in its value is the cost of production of the car not wear and tear. If you buy a one or two year old car the original buyer has already paid the production costs to the manufacturer so you are only paying for the value of the car alone not the costs of making it with the workers, the plant, and the shipping to the dealer. You can save a lot of money over the years not buying new.
- Always take as much of an employer 401K match that they will give. In the United States most major corporations and even some big businesses have 401K match programs. These are tax deferred retirement programs where the employer will match what the employee puts in to the account. Each company is different, some will match your income up to 5% others more, other less. If you make $50,000 a year and put in 5% of your income each week by the end of the year you will have contributed $2,500 then the company will have matched with an additional $2,500. Each week around $50 goes into your account automatically and the company also buts in $50. Your $50 becomes $100 a 100% return off the top. In addition this is pretax money in a standard 401K so you are differing taxes until you take the money out and use it which may be in 30+ years. You get your tax free 100% return off the top and the capital gains and dividends from investments also grow tax free until you redeem it. You throw in some good trend following strategies and compounding returns over many years and you can build multiple six figure accounts over the long term.
- Earning money through selling your time for wages is just one of many ways to make money. Explore other ways to make money, company profit sharing plans, stock options, investing, trading, dividends, real estate, cash flowing assets, and owning a business.
- If you ever have a chance to get equity in a company, pick that over wages.
- Minimalism can bring more happiness than materialism. The key is to buy only things that truly bring you the most value versus the cost instead of trying to soothe unhappiness with the event of purchasing something that leads to a short term regret.
- You can’t out earn excessive spending. If you spend all the money you make you will always be broke regardless of your income.
- Live within your means. Stay out of debt on depreciating consumer goods. Pay off credit cards monthly. Do not get into a mortgage payment that puts financial pressure on you to make the payment. Do not get car payments that you can not easily pay. This one rule will solve the majority of your financial problems.
- Having money doesn’t change who you are it just gives you the ability to amplify your strengths and weaknesses with less boundaries. This is why so many lottery winners and sports stars go broke. Your long term personal financial success will primarily be a reflection of your psychology and belief systems.
Money is not a means to an end. It is a tool for accomplishing your goals. Money can create freedom, happiness, security, and independence if managed to meet those goals and not wasted on things that do not matter.