Essential principles in money management
20 Sep 2020 - Ricardo PereiraWhat are your personal finance rules? Keep them brief.
TL;DR
These are the essential principles in money management that I got from David Almas (all credit goes to him):
- Invest much time deciding what you want money for.
- Draw a realistic financial plan but know it will fail. Review it sporadically.
- If you are going to save, do it before you spend.
- Avoid credits that destroy your assets.
- Get out of debt as soon as possible.
- Control your expenses. Review them annually.
- Invest in one or two very cheap investment funds.
- Optimize your taxes.
- Simplify and automate.
- Help others with time or money.
Personal finance elements
This is a mix of David Almas opinions and mine.
1. Invest much time deciding what you want money for.
The first principle is hard to define, but it is perhaps the most crucial step in personal finance, and many ignore it. As David Almas said, making money just to be more prosperous is not a good idea. If you don’t know where you want to go, will you be able to choose the best path?
One tip from David Almas:
Visualize yourself in the future!
2. Draw a realistic financial plan but know that it will fail. Review it sporadically.
You defined the goals in the first principle, so now you need a plan to achieve them. Think of what you can spare each month, review your expenses and income, think of what you can do to get more income, think of what you are good at, what you love to do and you’re good at. There’s always something we can do to get more income. Just be creative and draw a path.
Remember, life is uncertain and, therefore, the plan you choose will never be fully realized. You will have to adapt and review it on time.
3. If you are going to save, do it before you spend.
David Almas explains this perfectly: most people who manage to save they go like this: they receive the salary, spend the money over the course of a month and, before receiving the next payroll, apply the leftover (if there’s any leftover). It is necessary to invert: as soon as the payroll is received, a portion of the money should be invested. In this way, savings are forced to fit into the financial plan. Then, you have to adjust what’s left to last until the end of the month.
4. Avoid credits that destroy your assets.
David Almas suggests that you should only conceive loans if you buy a house, launch a business, or on a credit card (as long as it offers benefits and is paid monthly to avoid extra fees and taxes). Everything else must be kept away from your finances.
5. Get rid of the credits as soon as possible.
It is possible that, mathematically, loans are positive for personal finances: the interest rate may be lower than the expected return on investments. However, one must not forget the emotional field: it is liberating not to have debts. A person will never be financially independent if he has debts, for example, because he will always depend on a credit institution.
6. Control your expenses. Review them annually.
Since I created Money and if you know what it is, you know that I like to track every expense. It is the only way to know exactly where the money goes. It can be tedious, but it can be achievable and fun if you use the right tools.
Mobile apps are great for this because you can add transactions on the go. The best way is to track them right in the moment or near the moment, so you don’t forget them.
Over the year, you can review your expenses and check if it’s possible to get a better deal for the same service or product. We need to be aware of them and spend some time negotiating.
7. Invest in one or two very cheap investment funds.
Start small, create a simple portfolio until you are comfortable with the volatility. Take as long as it takes to choose these funds. Then try to stay faithful for as long as possible. Even if better funds do arise, do not switch instantly: change charges, in particular taxes, that does not justify the exchange. Review your funds every year, and stay calm.
8. Optimize your taxes.
It is a complex topic that requires much attention from those concerned with personal finances. Sometimes requesting some professional help could save you a lot of money. Try to be well informed.
9. Simplify and automate.
By simplifying and automating your personal finances, in addition to freeing your brain, reduces the likelihood of making mistakes with your money.
By default, it is better to have only one bank account than two. Triggering direct debits can avoid missing payments. Scheduling automatic fund reinforcements prevents your planned investment from failing.
10. Help others with time or money.
When I read this from David Almas, it reminded me that all the right choices I made in my life happened when I was happy. I believe in karma: what you give, you will receive it back.
Original version available at tlim.pt/elementos.
Thanks for reading,
RP