Money Management 101: The Best Personal Finance Guide to Building Your Wealth
Don’t wait until you’re 100% ready, or you’ll never start.
Many people put off managing their finances because they think there’s too much stuff to learn in a personal finance course. The truth is, you don’t need to know everything. Knowing the fundamentals that will help you figure out things as you go is enough. That’s what this personal finance guide is about.
Inspired by Mark E. Yegge’s Hacking Money: How You Can Crack The Wealth Codes To Create Abundance, let this huge personal finance guide teach you the ways to build wealth through proper money management.
What Is A Money Mindset?
“Money makes you more of who you already are.”
In most cases, money means the same thing from one person to another—that is, a valuable commodity that lets you pay for your everyday needs. The more you have of it, the more things you can buy with it.
However, there’s an important aspect that you need to be more conscious of, which is none other than money management. When managed properly, money can help drive financial freedom. It is this kind of money mindset that you should cultivate more as it allows you to get real value from your money.
To help you build the proper mindset about money, it is necessary that you understand how income, spending, and budget all work together to keep your money stream flowing. Here are some basic points to remember:
Income refers to money that you create by rendering work and may either be active or passive. The former comes from the salary that is paid to you for working, while the latter can be received without actually working by engaging in trade once, but which allows you to keep earning through time.
“You make the choice of what you want vs. what you need. Understanding that for each ‘upgraded’ choice now, you may be giving up an even better choice in the future.”
Ideally, you should not be spending more than what you’re earning so that you won’t run into a deficit. The general rule is to prioritize your needs over your wants. By being wise and conservative in your spending, you are harnessing the power of compounding the value of money that you have today for better or more favorable results in the future.
Budgeting is an essential part of personal financial management, allowing you to keep track of your income and spending. While it should be your goal to stick to your budget, you should practice flexibility in managing your budget because it is bound to change a lot of time.
An Overview of Financial Freedom
As with other life goals, financial freedom starts with having a clear vision. Perhaps you’re targeting a specific age when you can retire from work and simply enjoy the fruits of your labor. By making your vision as specific as possible, you’ll know exactly what you need to do to make it happen.
Financial freedom may mean different things for people based on their individual lifestyles, beliefs, or priorities. For example, some people feel financially free by owning things like a house, car, or other kinds of expensive property.
However, there are also people who believe that financial freedom is more than just earning money or being rich, but rather it involves investing in experiences that matter to them the most.
It’s also possible for you to shift your perspective about financial freedom as you move from one life stage to another. At the most basic level, you may consider yourself financially free once you get past the paycheck-to-paycheck lifestyle. You no longer worry about your monthly bills because you have the money to pay for them and still have enough funds in your bank account.
As you continue to build your savings, you may want to turn it into passive income, so you set up a business and make a profit from it. In this scenario, you equate financial freedom with using your passive income from your business, so you no longer need to put in the labor to earn money.
Ultimately, the goal of attaining financial freedom is to be ready to make a wide range of life decisions without feeling worried that you may end up messing up your finances.
“Financial freedom is when your passive income exceeds your (standard of) living expenses.”
Wealth Building Strategies for Your Personal Finance Journey
As you try to build your wealth, you need to follow good money habits that can help contribute to your goals. Make sure to include these money management hacks in your personal finance journey.
Create a Budget
What is a budget? It’s really just a map of your spending that tells you where you are so that you can get control.
A budget is a pretty straightforward tool or concept in money management. It involves making a plan on how you’ll be spending your money so that you don’t find yourself having difficulty tracking where it went.
In creating a budget, you keep a list of all the money that you expect to receive from your salary, business, investments, and so on. Your budget should also enumerate your expenses, properly grouped into categories like groceries, utilities, education, healthcare, car payment, insurance, loans, and other incidentals.
It doesn’t matter whether you want to create a daily, weekly, or monthly budget, and there are no hard fast rules either as to what kind of budget managing system to use. You’re free to choose the most suitable or convenient approach that you know, as long as it gets the job done of managing your finances.
Is budgeting (that) important? Absolutely! Here are some benefits of budgeting:
You’re able to control your spending
A budget is the single most effective way of determining everything you need to know about your financial status—how much you’re earning, how much money you can spend, and how much you can potentially save. It also serves as a reminder for you not to spend more money than what you earn.
You can stay on track with your goals
It’s easier to stay focused on your long-term goals when you have a budget. Instead of making financial decisions on a whim, you become more conscious about taking steps that you know can bring you closer to your dreams.
You’re ready for emergencies
You’ll never know when you’ll need extra money to pay for your car repairs or for a loved one’s medical emergency. A budget typically allots money for unexpected events, ideally one that should help cover at least three to six months’ worth of your living expenses.
You feel empowered about enjoying your money
Financial problems can negatively affect the quality of your life. It could make you lose sleep or be vulnerable to psychological distress. With a budget, you feel empowered because you’re able to take control of your financial situation instead of finding yourself being controlled by a lack of money.
You can increase your savings
Sure, budgeting is about spending your money wisely, but the other side of the coin is that you also need to save money for your future. A budget trains you to be more disciplined in automatically setting aside a portion of your income or earnings—no matter how small the amount—to set up a savings or retirement fund.
Choose Between the Saving vs. Spending Mindset
One of the tests of true financial strength is how well you avoid the trap of merely allocating your income toward spending instead of saving. When you’re on the spending mindset, you’re more likely to say, “I want this now,” which is the complete opposite of the saving mindset where you say, “I want this in the future.”
Did you know? Seventy percent of our economy is based on spending, or consumerism.
Consumerism is an accurate description of how society has been programmed to keep buying things, giving rise to the consumerism mindset. A couple of factors influenced this trend, including credit cards, which made spending so convenient that it allows you to shop even if you don’t have the money for it.
In the United States, the average credit card debt per household reached $7,104 in 2019. Needless to say, you’ll find it harder to save if you keep spending more than what you make because eventually you’ll find yourself sinking into debt—which brings us to the next step you need to take.
“Debt costs money.”
Simply put, debt is borrowed money. The main reason why you need to borrow money is to use it towards a purchase that you cannot afford with the money you have or don’t have. Personal loans, car loans, mortgage, and credit card debt are some of the most common forms of debt. In exchange for loans or debt, you promise to pay the principal amount plus interest.
Debt per se isn’t bad. In fact, you can use it as leverage if you want to invest in something that can give you a higher return than the total amount you need to pay off to clear your debt. In this case, it’s considered good debt because it allows you to add to your wealth over time.
The kind of debt you want to avoid is bad debt. With bad debt, there is no real opportunity for you to grow your wealth. On the contrary, bad debt tends to decrease your wealth. For example, taking out a car loan is considered a bad debt. A car’s value is quick to decline with everyday use, not to mention there is an immediate decrease in value the moment you drive a car off the lot.
In this case, it is not wise to borrow money—which you will need to pay off with interest—in exchange for something with a depreciating value, because then it becomes more expensive for you to pay off your debt.
Diversify Your Investments
Investing is when you put money or similar resources toward a precious commodity in order for you to generate income from it through compounding interest.
Here’s how compounding interest works: When you invest, the return on investment (ROI) can be compounded, and then the ROI starts earning, too. Through investments, you can grow your money exponentially, especially if you allow your money plenty of time to compound.
A diversified portfolio of investments offers many opportunities for you to create a passive income, which you can then use to hit your financial goals and, ultimately, increase your wealth.
Here are some of the most common types of investments:
Stocks let you buy shares in a company so that you become one of its part owners with many other investors. You could make money on stocks depending on the company’s performance, the type of stock you own, and the overall stock market conditions.
Bonds are when you invest in loans offered to a corporation, government agency, or other organizations. You could earn money through repayment of principal once the bond matures along with interest payments.
Investment funds refer to when you pool your money with that of other investors to be invested by a professional fund manager on your behalf.
Mutual funds are technically considered an “open-end company,” which raises money by selling the company’s own shares to investors and then using the money to purchase a portfolio of investment instruments.
Options are contracts that give you the right to buy or sell financial instruments at a fixed price within a specific period of time.
Bank products let you accumulate money through interest, although the rate of interest is usually lower than what you can get from other investments. Bank products where you can invest in include savings accounts, money market accounts, certificates of deposit, and federal insurance.
Real estate is one of the most popular and profitable forms of investing as it enables you to make money in several ways, including real estate appreciation, rent, and buying-and-selling, among others.
Take the First Step to Wealth Building
Building wealth does not happen overnight. It takes time to learn, plan, and update your money management strategies to eventually get to where you want to be.
You need, however, to take the first step towards your journey to building wealth right now. The more you delay the process, the harder and longer you need to work for your financial freedom.