Personal Finance 101 - Money Basics You Need to Know
The vast readership is clamoring. Annie! Write more about money! My wedding expenses post was a smashing success and at least 2.3 people reached out asking if will will be writing more about personal finance. Your wish is my command potential loyal readers!
You know by now that I am not afraid or embarrassed to talk about money. I think being afraid to talk about money is what keeps you from having it! Learning from others experiences is the best way to get better at anything - including money! While personal finance can be a overwhelming and confusing concept, the basics are really quite simple. And the basics are all you need to build actual wealth gain financial security and even financial independence! First, let’s define those terms and talk about why they are important.
Financial security. You are financially secure when you can deal with the things life will throw at you. You have a healthy emergency fund of about 6 months of expenses in cash and you have the insurance you need (medical, car, umbrella) to handle catastrophic events. Financial security means you are not living paycheck to paycheck. It is impossible to be completely prepared for every situation, but financial security means you can handle life’s road bumps without getting derailed. For example, last year we had a terrible hail storm in my neighborhood and almost everyone needed a new roof. I had just bought my house so this was a huge bummer. The value of the roof was also super low because it was very old so the insurance company depreciated it heavily. In the end, the new roof was $12,000 and I ended up paying about $7,000 of that out of pocket. Unfortunate? Yes, very. End of the world? No. I used the money I keep in cash, my emergency fund, to handle this roof situation, an emergency. Emergencies are really just unexpected cash outlays you don’t have a choice in (hint hint, not purchases for wants). After this expense, I rebuilt my emergency fund to it’s original glory over my next paychecks- the money I save each month was put into this fund instead of being routed into investments until that fund was back up to par.
Financial Independence. Financial independence (FI) is where the real fun begins. It is the ultimate goal of why you should save and invest your money. You have achieved financial independence when you no longer have to work to cover your expenses and can instead live off of your investments for the remainder of you life. Work becomes optional. There are many different opinions on how to calculate when you are financially independent, I highly recommend you read this article from one of my favorite personal finance bloggers (prepare to go down the rabbit hole). My favorite way to think about it is when your investments that make you passive income (stocks, real estate, etc.) are equal to 25x your annual expenses, you can live off of those investments and working is optional. For example, if you spend 40k a year, you need a million dollars in investments to be financially independence. I like to think about it this way because it really highlights how important your spending is to determining your FI number. Now, a lot of the time when people talk about FI, it is in the context of retiring early, like my beloved Mr. Money Mustache. (This movement is called FIRE: Financial Independence Retire Early) I think, unfortunately, this can make you believe that if you don’t intend to retire early, you can ignore personal finance. This is wrong! If you EVER plan to retire that means you MUST make it to financial independence at some point or you will either have to work until you are very very old, or live in poverty when you are elderly. Those are not good options, but that is the trap many people fall into by not paying attention to their money.
Now that I have properly scared you with poverty, let me introduce this Personal Finance 101 series!
I will be writing a series of seven posts covering the basics of personal finance that you absolutely, 100%, need, and must know/do:
2) Widen the gap between expenses and income- cut expenses.
3) Build your emergency fund.
4) Eliminate your consumer debt. Burn it to the ground.
5) Invest the gap.
6) Widen the gap- increase income.
7) Achieve Financial Independence!
That’s it! You can do it!
Stay tuned for the first, and perhaps most painful, of the steps: Tracking your expenses and figuring out your current net worth.