In some ways, personal finances can seem glaringly simple: you need to spend less than you earn, save the difference, and grow your net worth.
In other ways, though, it’s a complicated nightmare: every purchase that you make, every bill that you pay, and every cent that you earn comes into play in some way or another. It’s no wonder, then, that so many people find personal finances bewildering.
It’s important to understand the big-picture and long-term goals that you have for your finances, and to apply those things to everyday decisions. This helps you keep things in perspective. Read on for more information.
The big picture: structuring your financial goals
Let’s start with the big stuff: What are your goals? How do big purchases and big financial decisions shape your long-term results? And how does personal finance work, anyway?
Again: your goal is to earn money, spend less than you earn, save the difference, and use your savings to grow your wealth. That’s it! In practice, this means creating a household budget and addressing all of the little stuff that we’ll talk more about in the next section. It means working hard and earning money, and then choosing where to put that money.
Create an emergency fund first — that’s the financial safety net that will help you avoid financial disasters like toxic short-term debt. Next, start growing a savings account and, as soon as possible, start investing to grow your wealth.
Using tax-advantaged retirement accounts will help you maximize your savings, but remember that you need to keep some money outside of those. This way, you can access it when you need it without paying steep penalties.
A huge part of your big-picture financial situation is determined by how you use debt. Debt can be immensely dangerous in personal finance, but it can also be a tool for building greater wealth. A great example of “good debt” is a fixed-rate home loan or mortgage (generally, a fixed-rate loan is a more conservate bet than a variable-rate one).
Paying down a home loan is often better than paying rent because, over the long term, you’ll gain full ownership over a valuable asset. Of course, buying a home requires a big down-payment. Saving and investing require an income and smart spending decisions.
The devil is in the details
There are some very wealthy people out there who live paycheck-to-paycheck. While not all of us have the means to save lots of money, many of us do have those means and are squandering the opportunity. You need to be smart and trim your budget!
This means identifying patterns in the expenses you encounter. Smartphone expenses are a great example. You pretty much need a smartphone these days, but are you paying too much for new phones when you could fix your old one? You can repair an iPhone at a local shop for a very affordable price, and getting a few more years out of your old device can save you a mint.
Caring for your devices, protecting them with cases and screen protectors, and getting them repaired when needed instead of just replacing them are all examples of cost-conscious choices. Together, these add up to a big difference in your finances.
Food is another spot where waste adds up fast. Take-out, delivery, and meals at restaurants are far pricier than cooking at home. Are you eating too much of the wrong stuff? From here, we can keep running down a very long list of potential wastes, from video games to cocktails. What you need to do, though, is make your own list.
Track your spending habits by keeping a spending diary or using an app, and then attack the details of your financial picture. When you encounter a spending decision, think about your habits as well as the big picture that we talked about. Are you on track for your financial goals? Should you really spend this money?
Consider these questions carefully each and every time they come up. It’s the little moments that make all the difference.
