Basic Financial Principles PT. 1

Some things seem glaringly obvious to me, finance management is one of those things. I grew up in a household with an accountant for a mother so a few things might have trickled down. One of the more difficult challenges with managing one’s finances is knowing the circumstances of that individual. Each person is so different and their needs are unique to them; this is why having one system that should be applied to everyone is not going to work. There are also lots of tactics one can use to manage their finances with out needing to buy in to a “plan” or “program” to help them. These are my personal tactics, what I use on a daily basis to manage me funds and allocate them appropriately.

SPEND LESS THAN YOU MAKE

Simple, right? At least the concept is simple. Execution is the difficult bit. When I was growing up I developed a frame of mind that allowed me focus less on how much money I was making and more on where that money was going. “It is not how much you make, it is how much you spend” I would tell my self. This mindset allowed me to live very well within my means and acquire things that were important to me, but also gave me the freedom to not need things lower on the priority list. For example, I loved, and still do love, cycling. Mountain, road, cross country, whatever it is I just love being on a bicycle. This was my hobby, lifestyle, and transportation. It was also where a significant portion of my income went. That being said, I didn’t have a new car or other toys that were also very expensive; I had bicycles.

To get started, make sure you have a precise gauge on how much you are bringing home and how much your fixed costs (costs that don’t change like rent, car payments, etc…) are for the month. Then, subtract the fixed costs from your take home pay to have an idea of your “discretionary income” or the funds that aren’t already allocated towards bills. Make sure you are calculating how much you spend on consumable items such as food, gas, and entertainment every month. These costs can fluctuate greatly month to month but an overall gauge is good to have. Any funds left over after you have paid rent or a mortgage, utilities, food, and any other reoccurring bills can be used for any variety of things that you see fit whether that be investing, vacation, or treating yourself to something nice. The problem I see is anticipating those funds and spending next months or three months worth of discretionary income; now begins “spending more than you make”. My solution, sock those funds away in a separate account that you don’t see every day until you have enough to make the purchase.

Getting in to a habit of spending more than you make is easier than it seems, especially with credit card offers showing up in the mail every other day, car loans, and a mortgage (if that applies). Credit cards are not bad, just inherently risky to over extend yourself. By not using credit cards, you save yourself the trouble of accidentally spending a bit too much and starting a chain reaction of every month being a little more behind and going a little further in debt. If you do use credit cards, make sure they are paid off each month and make sure you have a little extra cash set aside just in case you do overspend or if there is something you would like to purchase outside of your normal spending.

All of this about spending, spending, spending, but what if you already do make more than you spend? Now is the time to invest, whether in yourself or into financial vehicles for retirement, or what ever the case may be. If your expenditures are less than your income, make those extra funds work for you!

Using your disposable or discretionary income to provide more income is an excellent tool. Multiple streams of income is not only satisfying but also provides more stability. Investing in yourself can be a variety of different things like going back to school or starting a side business. These are all ways of growing as a person and getting in touch with what really makes you happy and how you can make some extra cash doing what you love. In particular, I like side businesses. Getting a business license for home is surprisingly easy and filing a business name is no more difficult than ordering pizza, and the benefit of a side business is that it’s on the side, not your full time job, so it can be put on hold or if it doesn’t work out, you didn’t loose your main source of income. This will also allow you to pursue something you are passionate about, and fully willing to spend countless hours working on. In the end, it may remain a side gig or it may become your full time job! Then you are working for yourself doing something you love, and isn’t that really the goal?

Thanks for reading!

-Rhino