One thing that people don’t learn early enough is how to deal with money. Students graduate with all kinds of professional papers but miss one of the most important – how to deal with money. In the words of Vince Shorb;
“college graduates spend 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest and grow their money.”
Surprisingly, financial success has very little to do with IQ or level of education. I have seen people who despite having very low levels of education, they end up doing better financially than people who are considered to be in the noblest professions in society. Talk of surgeons, lawyers, engineers, or even investment bankers.
Financial literacy is a different kind of education. In the Richest Man in Babylon, George S. Classon writes,
“as the law of gravity, the laws of wealth creation are universal and money is plentiful to those that understand the laws that govern its acquisition.”
Wealth creation or financial success is a game like any other. And like all other games, you have to understand the rules of the game and play by them to increase your chances of winning. In the words of T. Harv Eker,
“There is a secret psychology of money. Most people don’t know about it. That’s why most people never become financially successful. A lack of money is not the problem; it’s merely a symptom of what’s going on inside of you.”
People who understand the laws of wealth creation, find it very easy to come up with ways to not only handle their finances but also to get other sources of income and more so, passive income sources.
The Fundamentals of Personal Finance
1. Have a High Savings Rate
If there is one thing that would bring life to your financial success story, it has to be saving. Saving is simply putting aside a certain percentage of your income. Robert Kiyosaki writes, “It’s not how much money you make, but how much money you keep.”
In other words, you have to learn how to pay yourself first. You can build wealth without a high income, but you have no chance of building wealth without savings.
One of the biggest mistakes people make when trying to save money is saving what is left after spending. Do not save what is left after spending. Rather, spend what is left after saving. You must learn to prioritize savings over expenses. Otherwise, you may never save at all as impulse buying and unnecessary wants will always eat on your savings.
2. Budget and Track Your Expenses
Budgeting is simply telling your money where to go. Tracking your expenses helps you know where your money went and learn more about your spending habits. If you do not tell your money where to go, you will always wonder where it went. Budgeting allows us to get the most out of our limited finances. It helps us satisfy our most important needs first and also save a certain percentage of our income.
When you track your expenses, you will quickly realize that it’s not the big expenses that eat up most of our income. It’s the small and miscellaneous expenses that cumulatively do the damage.
As the old mantra goes, “take care of the coins and the notes will take care of themselves.”
Come up with a strategy to divide your money according to your financial goals. This is one of the ways to strategize your financial success.
3. Live Within your Means
Saving money is simple but not easy. You can only have a high savings rate when you desire less. You can only desire less when you are comfortable with living below your means. This is against normal human behavior. As human beings, we tend to desire the good things in life. We want to live better lives than our peers. Hence we even go beyond our ways to spend money to show others that we have money.
Spending money to show people how much money you have is the fastest way to have less money. A poor man knows the true value of money and will not dare waste it. A rich man is extravagant and is always looking for an opportunity to empty his pockets.
4. Stop moving the Goal Post
In the Psychology of Money, Morgan Housel writes,
“The hardest and the most important financial skill is to get the goal post to stop moving.”
If you take a keen look at how people behave when they have salary rises or when they increase their income, is that they tend to quickly increase their expenses. This is commonly referred to as lifestyle creep. This is where when one increases their income, they also increase their expenses.
Hence they end up in the same financial position as all their positive increase in wealth is offset by the negative increase in expenses. Morgan Housel adds,
“When most people say that they want to be a millionaire, what they actually mean is; “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.”
If you can manage to reduce lifestyle creep with every increase in your income, you will get to have more money to save and to invest. Hence you will be setting yourself up for financial success.
5. The Rich Buy Assets, the Poor Buy Liabilities
An asset is something that will add more money to your pocket. A liability on the other hand is something that will take money out of your pockets. The rich understand the laws that govern wealth acquisition. Hence they use their money to purchase cash-producing assets like stocks, real estate properties, and government bonds. They then use the returns from these assets to cater for their liabilities like buying luxury cars, expensive holidays, and the like. On the other hand, the poor do not understand the laws that govern wealth creation. They spend their money on liabilities that only take more money out of their pockets.
Nick Maggiulli writes,
“just keep buying. What I’m talking about is the continual purchase of a diverse set of income-producing assets. You should think of buying investments like you buy food. Do it often. Make it a habit to invest your money like you pay your rent.”
The way to get rich and amass great wealth is by adding more assets into your assets column. This is how the rich keep on getting rich.
6. Life isn’t all about Savings and Living Within your Means
If all you think about is saving as much as you can and celebrating every time your savings or assets increase, then you are trying to win a race that you have already lost. Your money should work for you, not against you. We are taught how to save and invest but we are never taught how to spend our hard-earned money.
Enjoying life by using your money to afford nice things and experiences is also part of personal finance. Finding the right balance between spending wisely and saving for our future is important. And again we only live once. There is not much need to amass a great fortune that you will never benefit from.
Financial Literacy is only the Beginning
Financial success has far more to do with how you act than what you know. Dave Ramsey writes,
“Winning with money is 80% behavior and only 20% head knowledge. What to do isn’t the problem; doing it is.”
You can talk about saving all you want, but it’s income that builds wealth. It’s very hard to save money when you have a low income. You cannot personal finance your way out of poverty. Often, the problem is low incomes and not financial illiteracy.
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