Principles of personal finance knowledge
Principles of personal finance knowledge, to understand it stay keeping read it. I’m going to deliver some value to you and I hope you like it.
The first principles of personal finance for you to manage your finances in the best way possible
So, the first one is: create a life or investment plan. And let me tell you why this is so important matter. I chose this to be the first principle in my life that I apply (there is actually a logic through the 5 of them). This being the first one there is a very simple reason:
You cannot simply start a journey or a path, that you don’t know where you’re going…the destination is unknown to you. So this is just simply not possible because what’s gonna happen is your gonna start going into that path and you don’t know where you’re going, It is very likely that you’re not going to reach your goals, you’re not going to accomplish what you want in life.
And that’s why the life and investment plan is the first principle and in my opinion one of the most important ones. Because before everything, you need to know what you want in life, you need to know what you’re after.
So basically, I asked myself a couple of questions so that I could have my life or investment plan, and the questions I asked myself were:
What do I want in life? Where do I want to be in 5 years? In 10 years? In 20 years’ time? (that’s a long time). So it really depends on what you want from your life. This is the realization that you need to first get in your head and in your mind so that you can implement it in your life. So this is really important, because everything starts with you, knowing what you want. (this guy knows! his right).
The second Principle of personal finance, create a budget that works for you
So creating a budget that works for you is the second principle of personal finance management. Let me explain to you what the concept of budgeting is. So, budgeting is how you balance the income that you have with the expenses that you’re going to have as well.
So how do you manage the money coming in and the money coming out? By principles of personal finance knowledge
And the best way to do this actually guides yourself. You don’t need to make the exact same division of this rule, but you can guide yourself by this rule which is the universal rule that if you haven´t heard of it before. I’m going to tell you now which is the 20/30/50 rule. This means 20% of your income goes to your savings, 30% goes to your wants, something you want to do (entertainment, trips, whatever it is), and then I have 55% of the needs, my living costs. So, this means that your budget needs to be applied to the first principle that we’ve spoken before which is your life or investment plan.
So as you can see by my example, you can already see that I have a lot of % of my budgeting in savings, since I’m an investor myself and I have personal projects as well, my savings are a crucial part for me, in order for me to invest.
The third principle of personal finance, create a tracking system for your financials
This is super important and by the way, before I explain to you why this is so important, let me also advise you that you can find a tracking system tool that I created, I actually use it myself, it’s the real one that I use in my life to track my financials, my investments and
So on, and you can find it on my page. If you haven’t looked at it yet, please go there – it should appear here below – it’s Personal Finance Tools, I’ll repeat it for you, its Personal Finance Tools.
Have a look, I’m pretty sure it might be interesting to you, and you can purchase that tool that certainly is going to help you in your life. That said, creating a tracking system, this is super important, it’s essential for you to manage your personal finances, and the main reasons for that is because when you track and you register, every single money coming in:
- Where did it come from?
- when did it come from?
And every single expense that you have, every single cost:
- Why does this cost this much?
- What is charging me?
- Where is the money going?
So when you have a tracking system, you can actually analyze
Your financial situation at any given moment and this gives you a real advantage when it comes to controlling your finances. Because you have the power to maintain your finances up to date – that’s number one -, number two, you can actually adjust and follow up on your budget, because if you track everything you are basically keeping your budget in detail, in a deeper look I would say.
And number three, you can actually make projections, right?
So, let’s say if you have the same fixed costs every month, so you can fill them all in for the rest of the year, and that’s going to actually give you an idea of how much you can save during the year… How much you are going to spend during the year… where is the money going to go during the year… So, it’s very important for you to have tracking
System because it can give you a lot of detail on how you can actually improve and maintain the controlling of your finances.
Principle number four: create an emergency fund!
This is really essential for you if you are controlling your finances and let me explain to you why. Creating an emergency fund is the number one priority when you already know what you want to do in your life or your investment plan is, when you have your budget set up, and you have a tracking system, then you have the emergency fund you need to set up.
This is the first thing you do before you start saving any money. So let’s say something unexpected happens in your life, you will have some money put aside as an emergency fund. That’s what it’s for.
Let’s say something unexpected happens in your work, and you get fired… and then, you don’t have a job or at least you’re not going to have a job for a while, that’s when the emergency fund comes in, to sustain you until you do. So, for any emergency, the emergency fund is something that you can count on, to actually maintain your living costs for a long period of time.
Normally I would say that the emergency fund that I would say it’s acceptable is 6 months. So, what does that mean?
That means that you need to have the amount of money saved (put aside as an emergency fund) that covers all your expenses without any income coming in, for 6 months. So this is my normal advice. In my situation, I actually have an emergency fund that covers all my expenses for a full year. I’m just someone reserved, I like to have a plan B if something goes wrong, also, because I invest my money so I’ve lost money before, I know how this game works and I have an emergency fund for a full year = 12 months.
However, there are people that have it for 3 months or 6 months only, so it really depends on how much are the costs for your living and what are your plans, what happens in your life right? So having an emergency fund is number four, and this is the priority you have to set once you have everything planned already.
So finally, we came up with the last principle which is number five
Create and organize a savings plan. This is obviously as important as any of the others we spoke about before (if not more important even), but I would really say that organizing a savings plan is like the execution of your personal finance. It’s when everything comes together that it leads to the savings plan that it’s going to allow you to have the possibility to reach your goals, is that money that will make it possible.
A couple of tips on organizing your savings plan
The number is something that we actually have a tendency to never do, but it’s something that I’ve done all my life and it worked really well for me – which is living below our means.
And I can’t stress this enough. You need to have a lifestyle that goes according to your financial reality if I don’t have such a big of a salary and if I don’t have such big of an income coming into my household, then obviously I cannot go to a party every Friday and Saturday or I cannot go to a trip every month, or I cannot go spend any money
In things that I don’t need, only things that I want, and then I have no money at all.
So your lifestyle needs to adapt to your financial reality, and to me, this is something I’ve always done and worked really well. Another tip I can give you is what I call the multiplying effect, and this is not because I’m good at mathematics, that’s not it.
This is actually because I decided to multiply every single expense I had before, that I thought it was nonsense to have as an expense. So let’s say, I started doing this when I started to cut on my coffee outside the home: I would take coffee with a friend or with a family member, and then I would spend 1€, maybe 2€.
So, we think that’s nothing right? But if we do that let’s say 5 times a week… so 5 times a week for a 1€ coffee is 5€ and if we multiply that for a month, that’s 20€ a month.
Now if we multiply those 20€ a month, that’s actually going to amount to a big number at the end of the year. And that’s how I started to multiply everything I spent on a year’s timeline, and then I started to realize “well, I’m spending a lot of money on things that I don’t really need”.
That really allowed me to have a different vision of the things that I was spending my money on, and that’s what I call the multiplying effect. Last but not least, I would say that a final tip is actually for you to save everything that you can. Most of the time, especially when we are creating our budget, we realize that we cannot save much money.
But you know, at the end of the day, in my opinion, a penny saved is a penny earned! So everything that you can save, when put together and accumulated over time it can actually make a huge difference.
Even though you can only save 5% or if you can only save 10%, I think it’s actually going to be worth it. It just matters at the end of the day, anything you can save is worth to be saved because it will contribute to your goal in the long run, right?
Thank you 🙂