Roughly one year ago, I started writing about personal finance for TipRanks. Though it would be more exciting to regale you with tales full of astounding money-saving hacks, get-rich-quick schemes, and pots of gold at the end of the rainbow, at the end of the day I’ve found that personal finances can be distilled into a few basic, tried-and-true principles. Here is what I’ve learned writing about personal finance over the past year.
Personal finance surrounds every facet of our lives. We can learn lessons from our past behavior, our circle of friends, and even from Harry Potter. The secret is to make sure that you are aware of how you use your money, and whether or not it is helping you to live the life you desire.
It Is Not About the Money
I may shock you with the first lesson I’ve learned: it is not about the money.
Yes, I am aware that people read about personal finance to get a better handle on their money. Yes, at the end of the day, personal finance revolves around how we manage our money. Yes, money is the central component of personal finance.
And yet, I’m telling you, it is not about the money. Instead, it is about making decisions that align with your long-term priorities.
Like anything in life, we all want to make sure that our day-to-day choices are propelling us slowly but steadily towards our ambitions. These could be to retire early, to purchase a vacation home, or to make sure that our children’s college funds are fully paid for.
The creation of a budget satisfies a number of purposes, the most obvious being that it allows you to understand in clear, black-and-white numbers your income and expenses. At the same time, it can also serve as a roadmap for your long-term journey, helping you to make spending decisions that are consistent with your future goals.
In that sense, it might be more accurate to say that personal finance is not only about the money. It is about your goals, and being fully aware of how your spending, saving, and investing decisions are helping you to achieve them.
When In Doubt, Save More
Another lesson I’ve learned: personal finance is not just learning to manage your spending.
When it comes to spending, there certainly are plenty of options. At times, it can even feel like there are an infinite number of ways to part with your money.
That being said, most money management choices can be generally grouped into three basic buckets: needs, wants, and savings.
Needs are pretty self-explanatory. Housing, food, clothing, and other necessities such as insurance and childcare are musts that we cannot do without.
Wants are also rather straightforward. These discretionary purchases are items that you desire, but your life would go on if you did not buy them.
The more you can decrease the costs of your needs and wants, the more money you will be able to squirrel away into your savings. While you do not need to deprive yourself of all life’s pleasures in the here and now, it will behoove you to error on the side of savings when given the option.
The reason is as straightforward as it is important: you never know what the future will hold. An emergency might present itself, as could an opportunity. The more you have saved, the better positioned you will be to deal with any scenario.
Be (Very) Cautious About Debt
I would be remiss if I wrote a retrospective about personal finance and failed to include a discussion about debt.
Indeed, many of the biggest decisions in personal finance have the issue of debt front-and-center. There are many different types of debt, and it is important to understand the distinctions between them.
Debts that align with your long-term goals can be worthwhile. This includes mortgages to purchase a house, student loans to pursue an education, or auto loans that will allow you to drive a safe, reliable vehicle.
Bad debts, on the other hand, are motivated by a purpose that is more fleeting in nature. This could be splurging on the latest videogame system, going on a dream vacation, or upgrading to a flashy sportscar. While there is nothing inherently wrong with these discretionary purchases, you should budget and save for them. Taking on debt in order to buy something that will not serve your future self is a bad decision.
With high interest rates that often compound on a daily basic, credit card debt is a vicious cycle that can be difficult to escape. Servicing and paying off your consumer debts will prevent you from saving for your long-term goals, while weakening your finances immensely.
Be Intentional With Your Decisions
Lastly, I cannot emphasize enough the importance of being intentional with your decisions. As personal finance is the study of choices, it goes without saying that we should strive to make good ones.
The idea of intention applies to decisions both big and small. For example, taking on a mortgage is a massive obligation, with plenty of considerations at play. Chances are that you would take your time to truly weigh the pros and cons when buying a home, or really any large scale purchase.
However, one should not overlook smaller, day-to-day spending. While tiny purchases may not seem like a big deal, they can add up over time into pretty significant sums of money.
For instance, consider the daily purchase of a cup of coffee. The difference between ordering from the corner cafe versus brewing your own caffeinated beverage can translate into thousands of dollars over the years.
This does not mean that you should forgo this luxury if it truly contributes to your quality of life. It does mean, however, that you should be aware of the costs involved so that you can make fully-informed decisions.
Conclusion: Means, Not Ends
Money is a means to an end, and should not be the goal in and of itself. After all, each one of us needs a sufficient amount of money to live the lives that we want.
Being intentional about our spending choices is the principle feature of healthy personal finance. Once you have fully digested this simple fact, all your monetary decisions will become much simpler. And that, at the end of the day, is what personal finance is all about.
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