There are different approaches to saving money. Whether it's saving for a short term goal or saving for your retirement, people go about it in a variety of ways.
I admire those who have a set amount which they put aside each week (or each month) before they spend any money. I call these people conscious savers. It's a regular savings plan. The money is normally deducted from their pay or taken out of their bank account at the beginning of each period.
This sort of approach works for these people because there is a risk that if the money is not put aside immediately, it will get spent. It's a smart move and it lends itself to better long term planning, whether that planning relates to reducing debt or investing for the future or saving to buy a house or whatever.
Unfortunately, I'm not that disciplined. In fact my approach is the exact opposite. I tend to pay all of the bills and spend what I need to each month and only at the end of each month does what's left over get added to our savings.
Fortunately, that works for us. We don't have extravagant tastes and lead a fairly middle of the road existence and our income has always been such that we've been able to add enough to our savings each month to pay off all of our debts, including our mortgage and accumulate a reasonable investment portfolio that will someday become the foundation of our financial freedom.
Despite our success in the past at just following a saving what's left over approach, I do wonder whether a more conscious approach would put us further ahead over the long term. Maybe the extra financial discipline would enable us to save that little bit extra and help us reach our financial goals earlier.
The downside, as I see it, is that we may feel more constrained at living this way. There may also be more stress on our relationship if we attempt a more rigid approach to our personal finances.
Some personal finance blogs discuss at great length the benefits of reducing your debts and cutting your cost of living. The reason is that this will free up more of your money to be saved and invested for the long term. This is perfectly rational reasoning and should be the first step to getting your personal finances in order. But it's only one side of the equation.
I was recently browsing through the Startup Nation Home-Based 100 winners. It's a list of 100 of the best businesses which are run by people in their homes. Reading some of the stories reminded me that as well as reducing your monthly expenses, increasing your monthly income is a way to improve your financial position.
Most of these businesses stemmed from very simple ideas. The founder identified a niche and worked out how to fill it. Many of these business owners were just following their passion and now they get to do what they love for a living. How good is that?
A number of these businesses also had very low startup costs and started as way just to earn a little extra money.
I bet many of us have at least a couple of ideas like this inside us. With just a little time and effort maybe you could get a small business up and running just like these people. Who knows where it could lead?
I find that personal finance and money is no different to any other area of my life. Planning and goal setting are essential in enabling me to reach the outcomes I aspire to.
With the arrival of the new year, now is a good to revisit some of your goals and maybe set a few new ones. In this post I thought I would outline some of my personal finance goals for 2009.
Diversify My Income Streams
Like most people, my main source of income is from my day job. I have a modest portfolio of investments, mainly in the stock market, which produces some income as well. But this investment income is not yet enough to cover our family's expenses. I would like to reduce my reliance on full-time employment by growing my investment portfolio and perhaps diversifying into other areas.
Starting a small business is in the back of my mind as well. But ideally the set-up cost would need to be low and it would need be something I could run on a part-time basis initially. This is really nothing more than an idea for now.
Cutting Our Living Expenses
Last year I made some headway on this front, but I haven't been as diligent as I could have been. I've been going through our household budget and looking at how we can save money on the big-ticket items. It's surprising how much money you can save if you're willing to shop around for the best deal. Negotiating also helps.
Tidy Up My Investment Portfolio
The stock market investments I hold have held up reasonably well through the recent financial turmoil. As you would expect the prices have fallen from their highs but by and large they are in pretty good shape financially. However, I tend to be a collector of stocks and as a consequence the number of securities I hold tends to become a little unwieldy. I need to trim down the number of holdings to a more manageable number.
What is the definition of personal finance?
Personal finance is a remarkably broad subject. The simplest way to define personal finance might be to take a look at each of the topics which come under the personal finance umbrella.
Record Keeping.
One of the fundamentals of personal finance is record keeping. It provides the foundation for everything else to build on. Keeping records means keeping track of all of your financial transactions. This includes what you earn, what you spend, what and where your savings (if any) are, insurance, and the list goes on. Record keeping can be as simple or as complex as you like. Some people will be thrive on tracking every individual cent that gets earned, saved and spent on a daily basis. Others will find this way too much overhead and will instead record approximate figures on a weekly or even monthly basis. Most people will find a working solution somewhere between these two extremes.
However you decide to do it, the main thing is to keep at it. Record keeping will enable you to understand what your financial position is now and how you've progressed over time. It will also provide valuable input into the planning process.
Budgeting.
Budgeting could be considered the counterpart of record keeping. The two go arm in arm. Budgeting is the practice of estimating future income and expenditure. To create a budget you would normally offset your expenses against your income month by month for the next year (and beyond). That way you can see what the surplus or shortfall is each month. This can help with planning your investments or by identifying where your future cash flow problems might lie.
Financial Position.
Another key area of personal finance is your financial position. Knowing this is key. When used in conjunction with your record keeping and budgeting, your statement of financial position is a key tool in meeting your financial goals. In it's simplest form, it's a document which lists your assets and your liabilities and which will hopefully show a surplus on the asset side. Even if it doesn't show a surplus of assets, it will provide you with a starting point on your road to freedom from debt.
Credit and other forms of Personal Debt.
And speaking of debt, this is another broad topic within personal finance. Not many of us can go through life without resorting to some sort of debt. Whether it's a mortgage to fund the purchase of a house, a personal loan to buy the car of our dreams or credit card debt to be used for day to day living and the odd larger consumer purchase, most of us will be in debt at some time or other.
But there are different types of debt. Borrowing money to finance investments can be a powerful wealth generating tool. However payday loans and other forms of cash advance are normally to be avoided if at all possible.
Saving and Investing.
Saving money is something we should all aspire to. It could be saving enough money to put aside in an emergency fund to provide a financial buffer in unforeseen circumstances. Or it might be saving for the kids' education or maybe even an overseas trip. And saving ties in nicely with budgeting. Saving is what we can do what the money which our budget tells us should be left over each month.
Then once you've accumulated some savings, you may look at how to invest them. Investing is a complex area with many complex investment products available. You might buy shares, real estate or a mutual fund. You can even invest in non-financial asset like art or wine providing you know what you are doing. Investing is how you take your accumulated saving and put them to best use to grow your wealth over the long term.
Insurance.
What does insurance have to do with personal finance? Well, what's the point in doing all of that hard work to get your personal finances in order just to see some catastrophic event wipe it all out? That's why insurance is such an important part of personal finance. Whether it's your house, your car, your income, your health or even your life, you need to make sure you have enough insurance for the worst case scenario.
Tax.
Nobody likes paying tax, but with some careful planning and good advice, you can at least minimize the amount of tax you need to pay. I'm sure most people would agree that we pay more than enough tax already. And by organizing our personal finances better, we may be able to reduce our taxes freeing up more money to save and invest.
Retirement Planning.
For some people this is what it's all about. You need to make sure that nest egg has grown large enough to support you once you stop paid employment. By putting the right strategies in place earlier in life you can help ensure you have a comfortable retirement.
Mastering each of the above topics should put you well on the way to living large in retirement.
Estate Planning.
They say that death and taxes are the two certainties in life. While nobody likes to think about their own mortality, it's important to consider your estate. How should it be distributed? Do you have any special wishes? Is your will up to date? A little planning and forethought may at least remove some of the financial worries from this difficult time.
I think the topics above cover this broad subject area reasonably well. In future posts, I will refer back to this "What Is Personal Finance" post often as I drill down on each of these topics.
What is the Money Management Personal Finance Blog about?
I have finally decided to start a Money Management and Personal Finance blog. After many months of reading the writings of other personal finance bloggers and many years of successfully managing my own finances, I thought I would share what I've learned with the world at large.
But before I start, I need to make one thing clear. I am not a professional financial planner or money manager. I am not qualified or licensed to offer personal financial advice. What I publish on this blog will be my own thoughts and ideas. There will be rantings and ramblings about my own experiences. I'll write explanations of things I've learned or feel strongly about.
So keep this in mind while reading what follows. I would suggest you seek professional advice before taking any major decisions. What appears on here is my own personal view and may not be suitable for some or all of my prospective readers out there. Having said that, I'm hoping that I can provoke some thought and discussion with some of my posts.
I intend to write about financial planning, budgeting, saving money, investing and different forms of debt. I don't have any real plan for what I will write about when. I will just write about whatever takes my fancy on a particular day, but over time I will try to organize my writings into some semblance of order - something fairly easy to navigate for newer readers.
Also, I have quite a lot of other projects on my plate, so my posting frequency wont be very high. I'm thinking about writing 2 - 3 times per week but I suspect this will vary as both my time available and my motivation fluctuate.
So you have been warned. Read these writings at your own risk. That's it for now. In my next post, I plan on writing something about money management or personal finance.
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