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I used to be very bad when it came to personal finance. I didn’t even use a savings account until my mid twenties. That’s the best strategy for going broke. You either spend your money on crap, or you get lured in by speculative investments like Bitcoin, Ponzi schemes.
Anyway, if you’re going nuts because of all of the confusing financial advice out there; this article is for you. The goal of this guide is to help you get more control over your personal finances.
I will share proven strategies and methods that people use not only to manage their money but also to generate more money.
What Is Personal Finance? A Definition
Personal finance is the activity of managing your own money. It’s about how much you spend, save and invest. The way you manage your money depends on many different things. Age, education, ambition, family, country of residence, all play a role in your personal finance strategy.
What might work for a 21-year-old who’s looking at the stock market like a casino will obviously not work for my father, who’s in his sixties. While this guide will give you enough input to create a strategy, you must always look at your personal situation. It’s called personal finance for a reason. This is obvious. The reason I mention this is because so many of us compare our financial situation with others.
The only person you should look at is yourself. How others manage their money is insignificant.
The 4 Phases Of Personal Finance
There are stages to personal finance. It’s good to have an understanding of where you are right now because every phase requires a different strategy.
Phase 1: From Nothing To Something
This is when you’re living from paycheck to paycheck, without having any savings. When you’re at this stage, I wouldn’t worry about anything else but building a financial buffer. Just save as much as you possibly can. When I was at this stage, I did whatever it took to save at least one month of expenses. I worked more, and I saved more.
It’s okay to be stingy when you’re in this phase. Your future self will thank you for it.
Phase 2: Gaining Traction
So once you’ve saved at least one month of expenses, you’re no longer living with a huge burden of looming bills. Once you’ve saved up at least one month of expenses, aim for saving six months of expenses. But you’re just getting started.
During this time you can relax more and spend some money on yourself. But never save less than 30% during this phase. It’s important to quickly get to a nice cushion.
Phase 3: Having Peace Of Mind
So you’ve saved at least six months of expenses. Now, put it away in a savings account and don’t touch it. Everything you save from now on is meant for investing. Slowly dip your toe into some investments (more on that later). Remember that you don’t need to think about investing your money until you’ve got that six months of expenses.
Phase 3 is all about making sure you stop the financial bleeding. When you experience net monthly financial growth, you’re on your way to more financial freedom.
Phase 4: Financial Freedom
In this phase, you have enough cash and investments to cover your cost of living. In the beginning, you can make huge leaps if you go from nothing to something. Most people accept the status quo when they are comfortable. You have enough cash to buy small things or go on vacations. But you still need to work. In phase 4, you don’t need to do anything. It’s not a bad position. If you’re in Phase 1-3, your focus is to build your personal finance foundation.
Too often, people are obsessed with personal finance. They read about it every day, look at their spending multiple times a day, and freak out when they have to spend their cash on something big.
That means money controls your life more than you think. If you’re reading this article, I assume that’s the last thing you want.
Ways To Make More Money
I never want to rely on one source of income. That’s too risky. When you only rely on your salary, you will have no income if you’re out of a job. It’s the same if you run a business or have a freelancing career.
Another reason I pursue multiple income streams is that it challenges me to become a better person. When you challenge yourself to provide more value, you will learn new skills along the way. That keeps life exciting.
So if you’re only relying on one income stream, I challenge you to explore all the different ways you can generate extra income. Here are a few ideas:
- Start a web-shop—Sell something you use yourself.
- Write and publish a “how-to” book—Write a book about something you know.
- Create a product in 48 hours—If you want to create a product, give yourself this limitation: What product can I design and produce within 2 days? You will immediately eliminate 99% of business ideas. Now, only focus on the things you can easily create and sell.
- Buy and sell objects you know a lot about—Buying and selling is the easiest way you can generate cash and help people get what they want.
- Build an app—If you’re a programmer, why not build something yourself? Try to find ways to generate income without trading your time for money.
A Stoic Way To Invest Your Money
Unless you’re pursuing a full-time career in investing, the purpose of investing is not to make money at first. Too often we assume we can instantly make passive income by investing our money. But where does that initial money come from? You can borrow money, but that always comes at a price.
Investing is about creating long-term wealth. It’s an essential part of your personal finance strategy.
First, you manage the money you have, and then you use your money to generate more of it.
That’s how you build wealth. At least, this is the most responsible strategy. And it’s the strategy I pursue. I didn’t seriously think about investing until I was in my thirties. Right now, my investments are in real estate and stocks. I use the 90/10 rule, which is inspired by Stoic philosophy.
That means I put 90% of the money I dedicate to stocks in the Vanguard S&P500 index fund. No bonds or other index funds, especially after the COVID-19 pandemic, with interest rates at historically low levels.
And I use 10% to make a few bets on things I think will take off.
What type of investments fits best with your personality? If you can answer that, you’re more likely to stick with a winning strategy.
One of my friends only invests in commercial real estate. Another friend hates real estate because it takes time to look at properties, get funding, and manage the property. He prefers index funds and bonds. Both do well. Investing is like philosophy. There are a lot of philosophies and there’s no right or wrong way to invest as long as you’re achieving results. No matter what you do, make sure you do something that’s a good fit.
Most of us waste too much time and energy pursuing opportunities that are not the right fit in the first place. For instance, stock options make no sense to me because I’m too risk-averse. Learning more about that is a waste of time for me.
If you’re ready to invest? Here is what helped me.
Best Personal Finance Books
There are a lot of good personal finance books. I’ve read most of the books that are considered classic. Here are my three favorites.
The Richest Man In Babylon by George S. Clason
This book was published in 1926 and as far as I can tell, it was the first popular book on personal finance. The message of the book comes down to this: Rich people are rich because they save their money, don’t get in debt, and don’t spend their money foolishly.
The main message of the book is that you only get rich by paying yourself first. It’s a great book if you’re looking for changing your mindset.
Your Money Or Your Life by Vicki Robin and Joe Dominguez
What I enjoyed most about this book is that it teaches you to transform your relationship with money. This will change your life. Money is something you trade your life energy for. Think about it. You work to earn money.
More money is especially not better if you have to put your own well-being on the line. It’s never worth it. This book helps with realizing that.
The Little Book of Common Sense Investing by Jack Bogle
If you’re interested in index funds, you’ll love this book. Jack Bogle revolutionized passive investing. He founded Vanguard and created index funds.
Instead of buying individual stocks, Jack Bogle demonstrated that it’s much better to buy all the stocks in a certain index, industry, group, or even country.
History has shown us that indexing outperforms the majority of mutual funds. Plus, the fees of index funds are lower because they don’t have managers or expensive offices.
Be The Boss Of Your Money
Personal finance is all about expectations. For example, I don’t expect to never work again in my life.
I know that the FIRE community is all about early retirement, but that never attracted me. I simply want to do work that I enjoy doing. The idea of retiring and traveling is meaningless to me.
To me, it’s about making sure I’m the boss of my money and not the other way around. And I hope this guide has helped you to do the same.