- 14min read
Personal finance is an essential topic that has gained increasing attention in recent decades. The desire to lead a comfortable and secure life drives people to make financial decisions, often without adequate knowledge, leading to common pitfalls. This guide distills key financial advice related to financial well-being and lessons from various valuable sources, making it easier for you to navigate your financial journey. So, grab a cup of coffee and take 5-10 minutes to explore these insights.
1. Avoid Buying Property on Loans Without a Clear Repayment Plan
Buying property on loans can consume a significant portion of your earnings. While a house is an asset, the liability of a loan can be overwhelming. Monitor your cash flow and ensure you have a solid repayment strategy.
2. Start a Systematic Investment Plan (SIP) Early
Investing in a SIP at a young age can help you save 15-25% of your earnings. This disciplined approach to investing can yield substantial returns over time.
3. Be Prudent About Buying a Car
Avoid purchasing a car unless it is necessary for daily use. Cars are depreciating assets and can add to your financial burden without providing significant returns.
4. Don’t Fear Mutual Funds Due to Market Risks
The warning that mutual fund investments are subject to market risks often deters people. However, historical data shows the growth potential of mutual funds. Understand the risks and invest wisely.
5. Opt for a Simple Wedding
Extravagant weddings can strain your finances. A simple wedding can help you save and invest in more critical areas of your life.
6. Maintain Liquidity in Your Wealth
Ensure that at least 20% of your wealth is liquid. Liquid assets can be quickly converted to cash when necessary, providing financial flexibility.
7. Avoid Keeping Large Sums in a Savings Account
Considering inflation, money in a savings account loses value over time. Invest your money in assets that offer better returns.
8. Pay Attention to Brokerage When Investing in Stocks
Brokerage fees can eat into your investment returns. Choose your brokerage services wisely and keep costs low.
9. Separate Accounts for Different Types of Stock Investments
Having separate accounts for delivery and intraday investments makes monitoring and tax calculations easier.
10. Understand that Property and Cars Don’t Make You Rich
Wealth is built by saving and investing wisely, not by acquiring depreciating assets like cars and properties.
11. Insurance is for Risk Management, Not Investment
Never invest in insurance for returns. Insurance should be seen as a tool for managing risks, not as an investment vehicle.
12. Prioritize Your Health and Personal Life
Your well-being is the most critical investment. Stay healthy and live happily.
Financial Lessons Through a Desert Analogy
Imagine you’re in the middle of the desert. When you work, you get paid in water. Your main challenge will be to store and preserve this water.
The first problem you will bump into will be how to store your water.
Solution?
Use a glass instead of your hands.
Second problem?
The water will evaporate with time, correct?
To solve this you need a canteen with a cap to prevent evaporation.
Great!
The next challenge will be to resolve long term reserves.
This seems like a simple solution; you get multiple canteens and build up your store.
Amazing!
Next problem…
When you lose your strength to work, you will need to start consuming those canteens. Your life expectancy in the desert will be determined by the number of canteens you were able to accumulate during your work life.
Some people in the desert may have accumulated enough to drink during their elder years, some won’t.
Ideal solution?
Own a water well in the desert.
- Water = Money (cash)
- Water in a glass that evaporates = Cash in a bank
- Water in a canteen = Appreciating assets like gold, oil, or real estate
- Accumulated water in canteens = Savings in assets
- Losing strength to work = Retirement
- Water well = Cash flowing assets
Key Lessons:
- Money is a Temporary Store of Value
- Like water, money can lose value over time.
- Assets That Appreciate with Inflation Protect Value
- Invest in assets that appreciate with time to maintain value.
- Accumulated Assets Need to be Managed for Retirement
- Simply accumulating assets may not be enough. Plan for how you will use them in retirement.
- Cash Flowing Assets are Ideal
- These assets produce income passively, like owning a water well in the desert.
Steps to Improve Personal Finances
1. Live Below Your Means
- Sacrifice luxury now to invest in your future.
2. Build Multiple Income Streams
- Diversify your income sources for financial stability.
3. Understand Good Debt vs. Bad Debt
- Good debt generates more income than its cost, like rental properties. Avoid bad debt like high-interest loans.
4. Save 10% Every Month
- An emergency fund protects against unforeseen expenses and debt spirals.
5. Invest in Yourself
- Continuous self-improvement is crucial for increasing your earning potential.
6. Plan Your Purchases
- Avoid impulse buys. Make planned, well-thought-out purchases.
7. Surround Yourself with Like-minded Savers
- Your financial habits are influenced by your social circle. Choose friends who share your economic values.
8. Energy Attracts Money
- Money follows the effort and value you create, not just more money.
9. Mindset Matters
- A positive financial mindset attracts wealth.
10. Financial Education is Crucial
- Learn about money management early. Schools often don’t teach financial literacy, so seek knowledge independently.
11. Invest, Don’t Just Save
- Banks profit by investing your savings. Learn to invest like banks to grow your wealth.
12. Master a Rare Skill
- Skills that are in demand attract higher income. Invest time in learning rare and valuable skills.
13. Create Passive Income
- Eventually, aim to make money while you sleep by hiring others or leveraging technology.
14. Convert Hard Work to Smart Work
- Efficiency and smart strategies are key to maximizing your efforts.
15. Self-discipline About Money
- Financial discipline is essential for building and maintaining wealth.
16. Leverage
- Use leverage to multiply your financial impact with minimal effort.
17. Learn About Money When You Don’t Have It
- Utilize free resources to gain financial knowledge before you start investing.
Conclusion
Improving your personal finances involves intentional investing, disciplined saving, and continuous learning. By following these principles, you can build a secure and prosperous future. Remember, the goal is to create a sustainable financial ecosystem that supports you throughout your life.
