The basics of personal finance and getting them right. There is a minefield of information out there, lets start with simplicity.
- Spend less than you earn (keep some of what you earn)
- Protect against disaster (make sure you can keep earning)
- Invest (pay future you)
Getting the basics of personal finance down is difficult. It might sound simple, but to read the above list and think about getting it done is one thing, doing it is another. I heavily borrowed this list from Pete Matthew’s Meaningful Money podcast as I think it’s a nice, succinct way of putting it.
Humans procrastinate a lot, whether intentionally or not. Even this website and associated podcast and blog, we had the idea in December 2019 and you can see how far we haven’t come in that time!
Lets break each of these points down a bit.
1) Spend less than you earn.
Simply, if you overspend you end up in debt. Debt means the effects of compounding work against you. You are on the wrong side of it and its power. This is a bad financial place to be. Until you take action to resolve it you will remain on the wrong side and this side can have a negative impact on your mental health. See the post on financial anxiety for more on this area.
I used to spend more than I made, I wished someone would bail me out, it never happened, been there, waited long enough. Nothing changed until I changed. I stopped wishing and started acting. The most prevalent action I found was to consider why, really think why you are spending your hard-earned money. Is it for you? Or to make you temporarily feel better? Do you genuinely need whatever it is, or do you want it? Be honest. Stop maintaining illusions and start building solid financial foundations. Do something that future you will thank you for.
2) Protect against disaster.
You are the golden goose, the money maker, the source of income or the catalyst to bring in money. You should protect this earning ability, it’s the greatest asset we have in the financial world. Life insurance and income protection are so important and often under-purchased. No one thinks it will happen to them, until it does. After the event you will be uninsurable and in a dire situation. I too, was guilty of the above thinking until I changed that. Having a policy in this area means that if the worst does happen to you, your loved ones will get to keep the house, their way of life and it will grant them the time to focus on the important stuff like raising children and grieving without having to work mega-hours to pay bills. I feel it is essential for peace of mind, especially if you have a mortgage or children who are dependant on you. Hopefully this is the only money you ever waste. I sincerely hope you never have to cash a policy of this type in, that you are fit and healthy, but if someone does need it, they will be very grateful it is there.
3) Invest the rest of your money for the long term.
We at FIUK are advocates of the buy and hold method of investing, it is no secret. We use historical returns as a guide (not a prediction) to invest our money for the long run. Combine this with low costs of index funds and it makes the returns very compelling for a hands off ‘invest, forget and look out the window’ type approach. If any of you are familiar with the rapper Dave, he has a line in a song called Psycho stating ‘my currency is Kenyan, its in it for the long run’ we cant be sure that Dave is referencing stock market returns here but it fits for this purpose! His album is titled ‘Psychodrama’ and its properly good. He appears to have become rich overnight, yet he admits he put in years of hard work, early starts and late nights. My point is people who appear to become overnight successes are just getting the rewards from years of consistency, hard work, smart decisions and probably (not always) some good fortune along the way.
If you have read this far, thankyou. I have a few finance books at home and I wanted to share these with people who frequent the podcast/blog. If you look at our reading list there are a list of books there, some have an asterix next to, these denote the books I personally own. Choose one and I will post it to you. Email me using the email address on the contact page and put ‘Send me a book’ as the email subject.