Thursday, April 19, 2018

The Best Personal Finance Advice

What's the best personal financial advice that I can give you? There's a lot of good tips and tricks: invest in index funds, cut your cable bill, cook more instead of eating out. But the single most important thing you can do is to understand where your money is going. And in order to do this a good idea is to follow the "Getting Things Done" technique of writing shit down.

Ok so you don't literally have to write down your expenses but you need to track them. You don't even need to track every single expense, considering the 80/20 rule, but I'd recommend you do so anyway to get the whole picture. You don't even need to do this for a long time, just long enough. Once you get some period of expenses, you can be pretty certain that your expenses will be relatively the same in the future, unless you decide to change. You can do this in numeral ways. You can use an expense tracker like, you can use good ol' pen and paper, you can use an app (I'm using AndroMoney).

Once you have a general idea of where your money is going you can decide if your money spending habits match your actual priorities. If they aren't you can make changes. If you notice expenses that you don't really care about, you can make changes. You might even find some services you pay for but aren't using at all. One of the more interesting things that you'll find about tracking your expenses is that your behavior will probably change and you will automatically improve  your spending habits. Why? Because once you start tracking you take ownership for your expenses. When you know you have to log your expense, you will be less likely to make that silly purchase.

Now, this technique is really only for spending habits. Some people may argue that fixing your investments and making money is more important than spending. I disagree with that. While it is still really really important for your overall personal finance, fixing spending is more important than fixing income. Why? Because a dollar earned is not equal to a dollar saved. Your dollar earned is subject to tax, both income and sales tax. This leave about 58 cents per dollar of real earnings. So saving $1 by not spending actually saves you from needing to earn $2. A second issue is that if you don't have financial discipline, even if you earn more you might still be broke. There is a natural tendency for people who earn more to spend more. The world offers unlimited enticing options to put your money and if you haven't sat down and prioritized (is financial freedom and not having to work a 9-5 more important than that new gadget?), its easy to get sucked into the consumerism trap.