Personal finance is about habits, learning how to manage money, and how those habits affect our long-term financial stability. By practicing good personal and financial habits, we can establish financial security, reduce financial stress (or other types of stress), and work towards meeting financial goals. That involves making informed decisions, being disciplined with money, and continuously learning about financial concepts and strategies.
Arguably the most important component: Creating a plan for income and expenses, outlining how money will be allocated for different needs and goals, and have an idea of how current circumstances may affect budgeting.
Setting aside a portion of income for short-term emergencies and long-term goals, such as retirement or education. That could be in form of a savings account at a bank, a piggy bank, or CD’s (usually banks have various specials for CD’s).
Putting money into various financial instruments, such as stocks, bonds, mutual funds, or real estate, with the aim of generating returns and growing wealth over time.
Managing debts responsibly by making timely payments, avoiding excessive debt, and minimizing interest costs. Maxing out credit cards is probably the worst habit there is. APR’s are usually very high when carrying a balance.
Assessing and obtaining appropriate insurance coverage to protect against potential risks, such as health issues, accidents, property damage, or loss of income.
Preparing for a comfortable retirement by contributing to retirement accounts, such as 401(k) plans or individual retirement accounts (IRAs), and considering factors like Social Security benefits and projected expenses.
Planning for the distribution of assets and wealth after death, including wills, trusts, and designating beneficiaries.
Essentials of Personal Finance
Personal Finance is a mindset. No one else but yourself is responsible for how you distribute your own money at the end of the day. Of course, we all have our unique stories and circumstances. But here at TheFinanceJournalist, we always like to refer to Alex Hormozi who says that ‘There’s always someone who’s had it worse and has done it better.’ We like to recall this quote because it’s pushing us to keep going, keep learning, and stay on track.
One strategy we’ve applied in our lives is the 50/30/20 rule, which is, according to the United Nations Federal Credit Union, a solid foundation to take into account when budgeting.
Let’s view an example: A $50,000 after-tax income distribution according to our graph above looks like this:
- $25,000 towards living expenses. That is $2083.33 every month on rent, food, and other bills (considered must pays)
- $15,000 towards wants. That is $1,250 every month on literally anything (car, vacation, take out food, etc.)
- $10,000 towards savings/investments. That is $833.33 every month towards a savings account, IRA, stocks, or other investment.
Do we think that $2083.33 will get you a nice apartment and pay for food and bills in NYC? Absolutely not. However, the same amount of money may be more than enough in a smaller town somewhere else. So, figuring out current circumstances is a key to successful budgeting.
Cars – Depreciating assets
It is recommended to spend less than 10-15% of the monthly take-home pay on car payments. Otherwise, your payments will eat you up.
Take into account gas, repair costs, maintenance, and the big buzz kill -insurance. According to Forbes, the average insurance premium in the U.S. is $2,150 per year. That is about $180 a month.
Fun Fact: An Oil change for a Bugatti costs about $25,000.
Some classic no-brainer money wasters include unused insurance premiums, unused gym memberships, credit card interest payments. We found our own Top 3 traps that we could easily avoid especially college students and low-income households.
If you want to improve on positive habits, ‘Atomic Habits‘ by James Clear is a great book we would recommend. Check out our library for more.
Let’s face it: Your favorite cold-brew is probably $5. Let’s do some math.
If we do this for five days a week in a 52-week year, that gives us ≈$1300 a year – spent on coffee.
How much do you spend every day on your little pick-me-up? Do the math and see what you got.
Bars, Drugs & Alcohol
Bar covers start at $10 a person just to get into the venue. What is missing? – Drinks, maybe food, and maybe a taxi or Uber to get home. Let’s argue that one visit is ≈ $50, if not more. Doing that once a week for one year adds up to $2600. Some may go out multiple times a week. Especially college students in bigger cities tend to go out more frequently, which would raise average spending in those places.
What do you think? Is $50/week reasonable?
We asked 50 people of different ages and life situations about how much they spend on online entertainment every month. Turns out that, on average, one person spends about $50 on entertainment every month. That’s $600 a year – on streaming platforms, music subscriptions, video games, or other games.
Do you frequently use all of them?
Those three examples amount to $4500.
Example: Let’s say we make $40,000 a year after tax. That is $3,333 a month (assuming we work 160 hours a month). That’s an hourly wage of ≈ $21. That makes our calculated $4500 equivalent to 214 hours of work.
Our calculations represent the low end and surely don’t include take-home food, new clothes or shoes, vacations or other trips, concerts, gas money, club memberships, a new phone, gifts, furniture, etc. This is a very small portion of things that we spend our money on, knowing that it’s not necessary, but we spend it regardless. If you can afford it – Perfect! But if $4500 seems like a lot to you, maybe this just changed your perspective.
Also influenced by Alex Hormozi is the concept of ignorance tax that we pay by not knowing something. Not knowing something is costing us money every day, because we lack to take advantage of the opportunities that are presented to us. We’ve seen this as a wake up call for us to get things done, learn new skills, make new content, and take advantage of opportunities to create. We would categorize ignorance tax as another form of money waster, since not actively searching for new areas to earn income is a missed opportunity.
Where did all our money go? Spent it.
Our high standards make us believe that we can spend infinite amounts of money. Classic, thee more we make, the more we spend. That’s what we call lifestyle inflation (influenced by Alex Hormozi).
Instead of a $5 coffee every morning, let’s make some at home for $0.20. It’s the little things and small habits that form us as individuals. If we can make ourselves not spend money on poor purchases but actively spend money on smart purchases, new opportunities will arise, and we can focus on new goals.
So, where’s the fun in life?
None of those things need to be cut down to 0, but may be reduced. The funny thing is that everybody knows this stuff. It’s not that we don’t. But we keep doing these things because somehow we’re still doing okay and tag along.
Treating oneself is great and helps us emotionally to move on with our day and is in fact motivational for some people. But if we’re trying to get our finances together, those numbers should convey an eye-opening scene.
Note: We’re using not spend instead of save because we believe that it makes us actively allocate money towards more important things like education. So, we don’t necessarily save the money but allocate it differently, hopefully in a smarter way.
Disclaimer: This content is for informational purposes only and is not intended as financial advice. We try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions. There are risks associated with any investment which include but are not limited to stocks, bonds, currencies, cryptocurrencies, as well as any other market or investment vehicle. For more Terms, click here.