Introduction
The finance industry is extremely complex. It is demanding, complicated, competitive, and unforgiving. The market for securities (stocks & bonds) is volatile and full of intangible variables that alter its swings from up to down. However, personal finance is actually quite simple. The concepts involved are basic and fundamental. It is so easy that it can be taught at the most basic level. In fact, even the average Joe can become financially secure if common practices are established. You just need to start.
Personal finance can be defined as the science of handling money. To expand, it entails all of the financial decisions and activities of an individual or household. It involves the practices of earning, saving, investing, and spending. It all comes down to how much you value and respect money. If you respect it, you will become wealthy. If you don’t, you will be poor for life.
Breaking It Down
Of course, personal finance can become more difficult when assessing various items such as return percentages, interest rates, debt repayment schedules, and cash intensive purchases. However, fundamental practices and habits are more important early in life or if you want to become serious about getting a grip on your financial situation. The problem is, for some obscene reasons that I cannot fathom, simple personal finance skills are not taught at an early age. Therefore, many of us either learn from our elders or learn on our own. I am fortunate enough to have learned about simple finance and complicated finance on my own at an early age. The irony is that basic (personal) finance is not only simpler than complicated finance (graduate level finance studies), it is more powerful for the individual to know.
Personal financial planning does not require a financial advisor. It just requires basic education. Analyzing your current financial situation, anticipating short-term and long-term needs, creating an execution plan, and repeating steps are all necessary. An individual needs to understand what personal assets and liabilities are (please see my post: Learn Your Balance Sheet for more detail). In addition, an individual must establish a realistic monthly (yearly for long term goals) budget and understand a basic formula. This is all very transparent if the software package Personal Capital is used. This wonderful software tool combines all of your accounts and creates budgets, cash flows, and your personal balance sheet for you. If you want to get serious about your personal finances, download this software. It will change your financial life. Click here to acquire Personal Capital for free!
My Personal Finance Formula: These steps must be executed in this order.
- Receive Money
- Pay Yourself First
- Pay for Necessities
- Pay for Pleasure
- Repeat
That’s all there is to it folks.
What individuals do with their money once it is earned is probably the most important part. The key is to automate the money so it is routed to various accounts that are not your spending accounts (checking accounts). So therefore, you must work with what you have leftover. Then use the amount of money after you pay yourself first to pay for necessities established within your monthly budget. After this, use whatever money is left over for pleasure. If you run out of money for the given month, start saying no to pleasure. Find other enjoyable things to do that do not require you to spend a dime. Trust me, they exist.
Immediate Steps
- Stop Spending
- Pay Off Credit Cards
- Build a Cash Cushion (through automation)
- Automate Savings to Investment / Retirement Account Vehicles
- Automate Savings for Goals
Final Thoughts
As mentioned, the concepts of personal finance are easy. In fact the execution is easy from a conceptual point of view. Save more than you spend. However, it becomes difficult due to will power and outside variables influencing your spending habits. Once you understand that money is the key to your freedom from work, you will learn to respect it. Once it is respected, everything else will fall into place and you can enjoy a life that hopefully should be much more fruitful.
Bottom line…do not think you cannot get a grasp on your personal finances. Follow the steps above as a simple framework. If you cannot, it probably means you have a zero or negative cash flow. However, will power is the key to make the numbers work. If you do not make enough money, research ways to make more. If your expenses are too high, reduce them. You owe it to yourself and to your family.
Learn to respect money. The poor spend it. The rich save it.
Redefine.
-James