Personal Finance 101

School prepared me wonderfully for memorizing and reciting facts by heart and executing orders, but it failed to prepare me (and most others) for real life. Nobody taught us how to handle money, how to do our taxes, how to lead good relationships or deal with conflict. So when I left school, I felt woefully unprepared for life and while I've always been very structured when it comes to money, I also felt like a dark cloud was looming over my head because I didn't know how to save and invest my money wisely. I'm still by no means an expert, but I have at least informed myself about finances to a point where I feel okay with the way I handle my money.


This article is a basic guide on money if you've never given much thought to your finances, if you're unaware of where your money goes at the end of the month, or you're just starting out managing your own money. Here are my 4 fundamental rules.


Rule #1: Get Rid of Debt


The very first step in personal finance is to get out of debt - even better if you don't get yourself into debt in the first place. This is specifically referring to credit card debt, or any debt you incurred by purchasing impermanent assets (things like a TV, car, education...). If you are paying off a mortgage, this is not debt, but an investment (real estate) that you are paying towards. My personal rule is to never buy anything on credit. Save the money first, then buy. I understand it's a very nuanced topic and there might be situations where taking on debt is justified, but for the purpose of keeping this article to the very basics, I'd recommend to stay away from debt altogether.


Rule #2: Build a Safety Buffer


Once you're free from debt, let's start from 0 and make sure you are protected against emergencies. If you spend your full pay-check every month and save nothing, you could find yourself in trouble if you get an unexpected tax bill, need a new phone, or have to get something fixed unexpectedly. For this case, it's recommended to keep a buffer on your bank account, which you can access at any time. The amount should be roughly 3 - 6 months of your net income, so that you would be able to survive this amount of time in case, for instance, you lose your job and aren't able to find another one right away.


Rule #3: Budget


Now that you covered the most important bases, it's time to get a picture of your spending habits. You can only be in control of your finances if you're aware of where your money goes. If you don't know how much money you spend, there is no way to optimize your finances.

One way to do this is by recording all of your spending in a budgeting file, or using an app that automatically tracks your spending. You can find a template for a budgeting file below, which you can download and adjust according to your needs. You can define how much money you want to spend in each category, enter every little spending into the respective category, and then review it at the end of the month and decide where you want to spend more or less money. You don't necessarily need to restrict your spending. What matters most is to be aware of where your money goes.

2021 Budget Template
.xlsx
Download XLSX • 16KB


Rule #4: Invest


We're not in the 20th century anymore, which means banks don't pay you interest for lending them your money anymore, but instead charge you for depositing your money with them. So unfortunately your money won't multiply on your bank account by itself, like it used to a few decades ago. If you want your money to keep or even increase its value, you need to invest it. This article will not go into the details of investing because there is an endless amount of knowledge to be gained, so I will give you some resources below for further information. Do you know any other books, podcasts, or websites about investing, which you can recommend?

Which type of investment you choose depends on your personality and financial goals, but some examples of investments could be stocks, real estate, cryptocurrencies, precious metals, and many more. The only rule I would give you is to DIVERSIFY. Try to invest in different types of assets to spread the risk. How the ratio of these investments looks in detail is up to you.


Resources:

Mr. Money Mustache https://www.mrmoneymustache.com

Rich Dad Poor Dad https://www.richdad.com

Ramit Sethi https://www.iwillteachyoutoberich.com/blog/

Mintlife https://mint.intuit.com/blog/


Disclaimer:

I am not an expert, I just researched this topic from a place of personal interest. If I used incorrect terminology or expressed something incorrectly, please feel free to let me know.

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