Have you ever wondered why we assume having a car is an asset when it doesn’t provide any returns and instead depreciates in value over time!
To be quite frank, some of our basic financial understanding are wrong. If the use of having a car doesn’t outweigh its rate of depreciation, a car is basically a liability!
Personal finance is something not taught at school or universities. But it’s one of the most important skills everyone should master to move ahead and live a worry-free life.
The only way to master personal finance and money management is by yourselves.
But that doesn’t mean you have to wait till you make a mistake to learn. We can learn from the wisdom of people who have been practicing money management principles for centuries.
The aim of this guide is to highlight some of these principles and help open your eyes to thinking rich.
We have curated a list of 15 personal finance tips that will truly help you improve your finances and manage money better. They will change the way you think about money.
Without further ado, let’s get started!
1. Starting a Budget
If you haven’t given a thought to budgeting yet, it’s high time you did. Having a budget can significantly improve how you manage your finances.
Maintaining a budget will give you detailed insights into how much money you make, how you spend the money and point out the unnecessary expenses that can be eliminated.
2. Know Your Net Worth
One of the most crucial thing most people forget to track is their net worth. Most of us are really interested in knowing the net worth of celebrities and billionaires, but forget to track our own net worth.
Knowing your net worth gives you an idea of where you stand financially and helps you plan better for the future.
To calculate your net worth, you have to first identify all the assets you own (including land, home, savings, investments, etc.) and the debts you have (mortgages, car payments, educational loans, etc.). Subtract your debts from the assets, and you will get your net worth.
Track your net worth continuously. If possible, monthly or at least quarterly. This will help you understand how fast your net worth is growing and the future plans you should prepare.
3. 10% of All You Earn Goes to Savings
Have you read the book, “The Richest Man in Babylon“?
It’s one of the personal finance classics. If you haven’t, do try to read it.
There were many personal finance takeaways that I had from this book, but the most important of them was the rule that 10% of all you earn goes towards savings.
It doesn’t matter what financial situation you are in. Irrespective of whether you are struggling financially or living a luxurious lifestyle, you have to save at least 10% of what you earn.
This will be your war chest. With time, it will gradually start growing and multiplying.
Please note that if you can save more than 10% of your earnings, do that. Save/Invest as much as you can.
For example, if you follow the 50/30/20 budget rule, you will save 20% of your income. And there are budgeting methods where you save 1/3rd of your income.
The important thing is that you must save at least 10% of everything you earn.
This money that you set apart is essentially the money you pay yourself. And you always have to pay yourself first.
You must make sure that you pay yourself before you set aside money for all other expenses (be it needs or wants).
“Rich Dad, Poor Dad” is a highly insightful book that will help and inspire you to inculcate this habit (of paying yourself first). Please do read it if you haven’t before.
It’s a must read for anyone wishing to improve their finances.
4. Multiply Your Money
In the last point, we said that you must save at least 10% of what you earn.
But saving here doesn’t just mean putting your money in a bank account. You have to make it multiply.
You have to make sure that you receive a good interest on your savings. Not jus 3-4% per annum when inflation nowadays is more than that.
You have to aim for two figures. If you can manage to gain returns of 10% or higher every year on your savings, you will see your money multiplying.
The power of compounding is truly mind blowing. Wanna see an example?
Assume that you start saving $1000 every month and get a 10% annual interest on your savings.
Do you know how much this $1000 a month would become in 10, 20, 30, and 40 years?
You will have $191,249.10 at the end of 10 years.
$687,299.99 at the end of 20 years.
$1,973,928.27 at the end of 30 years.
And $5,311,110.67 at the end of 40 years.
You only had $191K at the end of 10 years, but more than 5 million dollars after 40 years. That’s the power of compounding!
This is what you stand to gain if you can save $1K every month from your 20s and get a 10% return on it.
Now think of saving more than $1K every month. Or what could happen if you can gain more than 10% every year.
It’s mind blowing how money multiplies with time.
Be it directly on stock markets, mutual funds, real estate, or any other business, invest a part of your income on high yield assets.
5. Understand Credit and Improve Your Credit Score
Having you ever seriously thought of improving your credit score?
If not, you should.
It’s important because it could hurt you in the future otherwise. Be it for getting mortgages, car loans, or any form of credit, having a good credit score is really important.
Even the interest rate charged on your borrowings is dependent on your credit score.
Credit score is the measure of trustability. It shows the financial institutions how well they can trust you. Make sure that your score is always above 700.
And more than just improving your credit score, you should try to learn how credit cards actually work. Because if you get into credit card debt, you will find yourself paying insane interest rate on your debts.
Never ever get into credit card debt.
But do not discard credit cards as evil either. Because if you can make the cards work for you, you will notice how amazing they are.
Develop healthy credit card habits and you will automatically have a high score as well as be able to exploit the advantages of them.
6. Develop a Habit of Reading Personal Finance Blogs and Self Improvement Books
If you want to improve your finances, you have to keep learning.
And how do you do it?
By reading. Reading books and blogs.
There are many personal finance books that will teach you the time-tested strategies to save, earn, and grow your money.
All you have to do is to find a few hours every week to learn. Try to keep aside 2-3 hour every week for reading and learning more about personal finance.
It is up to you to actually stay up to date and keep learning.
No one is going to teach you how to manage your finances or grow your money. You have to take action, start learning, and try to improve constantly.
The biggest investment you can make is on yourselves.
And do not limit yourself to learning personal finance topics alone. Read more about finance in general.
Enroll for finance courses (you can take free courses taught by popular universities on platforms like edX and Coursera), buy more books, and learn through experimenting (by actually starting a side hustle, investing, etc.).
You should reach a stage where you actually understand finance terminologies. For example, terms like ROA, ROI, ROE, etc.
Also try to pick up a bit of accounting. Master financial statements like balance sheet, income statements, cash flow statements, etc. This will help you expand how you look at businesses in general.
At the end of the day, make sure that you stay sharp and keep on learning.
7. There is a Limit to How Much You Can Save, But Not to How Much You Can Earn. Earn More!
You can only save a part of your income. It’s limited. Whether it’s 10% of your income, 1/3rd of your income, or your entire income, saving is limited.
But you can always earn more.
Start a side hustle. Start building more sources of income. This is the only way way you can truly get rich.
This blog itself started as a side hustle which now has turned to be a consistent source of passive income.
Pick up a side hustle and work on it. It will pay you off in the long-term.
Wondering which side hustle to try?
Read this guide to explore 35 interesting side hustle ideas: 35 Best Side Hustle Ideas To Make Money
We recommend blogging to people who are starting out. It’s easy, needs only a small investment, and is extremely profitable.
Moreover, it hardly takes 30 minutes to set up your blog.
8. Do Not Compare Yourself With Others
Each person has a financial journey of their own. No two people will ever be the same.
Maybe that friend of yours grew a startup to millions in valuation, another built a successful blog or YouTube channel, someone got hired in that dream company of yours (with dream pay as well!)
But do not think that you will never be like them. Maybe your journey is destined to start late. It’s okay.
Comparing yourselves with others financially will not help you. Instead, compare yourself with you from a month back, a year back.
That’s what you should be doing. Verify if you were able to move ahead from where you were a year back.
If you haven’t, then that’s trouble. Then, it’s time to reflect back and see why you were not able to move ahead financially.
In short, do not compare yourself with others financially, rather compare with yourself from the past.
9. Start Early. Start Today.
Always know that tomorrow is in the future. It’s something you cannot predict. You might want to keep things for tomorrow, but please do not.
Start today. Right now.
If you are planning to start investing next year, throw away the plans and get a brokerage account today.
If you are planning to start a blog when this office project you are working on ends, the chances are you won’t. Because if you are lazy today, you will find an excuse in future as well. Start your blog today. Work on it when you have the time, but start today.
The power of compounding is a wonder. Be it saving, investing or starting a side hustle, start early!
This is especially the case if you are in your twenties or thirties. Because time is in your favor. Make use of it.
Also, do not get complacent with what you have and postpone your plans for future waiting for things to change. Because you won’t grow if that’s the case.
Irrespective of whether things are going your way or not, do try to keep growing. It’s all about the present.
10. Learn to Think Thrice Before Making a Financial Decision
There are needs and wants. Then there are unnecessary wants.
You should try to eliminate them. Before spending money on such things, think carefully if you really should. Because chances are it’s not a wise use of your money.
Make sure to think twice before you make any spend. Be it something as essential as groceries or for something of desire like a Gucci dress, think twice, if not thrice.
Think even more when it’s a larger commitment like mortgages, car payments, educational loans, etc. Do a research if the results outweigh the costs. Then and only then should you go ahead with a financial decision.
11. Diversify Your Wealth
Do not put all your eggs in a single basket. Because if the basket falls, you will lose everything.
Same is the case with wealth. Do not put all your money in a single place. Diversify your wealth.
If you invest all your money on a single company and it goes bust, you are in trouble. If you put all your money buying land somewhere that became inhabitable due to drought, floods, or even pest infestation, you are in trouble.
Build a portfolio of investments.
Spread your wealth across different financial instruments like stocks, real estate, businesses, mutual funds, bank accounts, gold, etc.
12. Keep Track of Your Lifestyle
Have you noticed that even though how much you earn has increased over the years, you still find it hard to save any money?
It’s like all the money is going somewhere.
That’s because of your change in lifestyle. As your income increases, you will move to a bigger house. You will buy a bigger car. And you will spend more on entertainment.
But all this while, your savings will remain the same.
You used to save $10K a year when you were making $50K, but you still save $10K when your salary is $100K. This is something a majority of people go through.
But if you learn to strictly pay yourself first and decide to pay in percentage of your income, you will be able to overcome this situation. If you strictly set aside 25% of what you earn the moment your salary reaches your account, you will do better.
Keep a track of your lifestyle and your savings. Make sure that your savings and investments are growing proportionately with your earnings and lifestyle.
13. Little Drops of Money Make a Mighty Debt (and Savings)
We all know the saying “Little drops of water makes a mighty ocean”.
Same is the case with money. If you keep losing small amounts of money here and there, you will have lost a fortune.
It could be those little bank charges, maintenance fees, or the money you overpay as tips (tips are good, tips are necessary, tips help people, but “keep the change” thought romanticized by movies isn’t always good financially), you are essentially losing your own money.
It might not seem much at the time. But over a period of time, they will all add up to a pretty big amount.
The same applies to the case of savings as well. It might not seem much when you are saving a little amount here and there. But over a period of time, it will add up to a huge amount.
Remember our previous compounding calculations?
$12 saved a year (with 10% returns) in 40 years will not be 12 x 40= 480 dollars, but 5300 dollars instead!
14. Understand the Real Meaning of Assets and Liabilities
In a way, we are completely unaware of many crucial and must-know financial concepts. It’s like we are taught to think the wrong way.
It’s only natural to think that a home is an asset. A car is an asset.
But in reality, they aren’t assets. They are kind of liabilities.
They depreciate in value over time and doesn’t provide any returns.
Why should anyone call such a thing an asset!
If you are confused about this concept, do read “Rich Dad, Poor Dad“.
It will open your eyes to thinking rich.
15. Be Frugal, But Do Not Forget to Live Your Life!
It’s good to be frugal and avoid spending money on unnecessary expenses. But you should also make sure that you are not missing out on life.
As some people would say, we will not take what we earned with us to the grave. They would question the use of earning a fortune when that’s the case and would advice “Live, its all that matters“
Obviously, it’s highly important, but it’s not all that matters in life. For one thing, if you earn a fortune, you are helping your family and future generations. You will be indirectly helping the society (through philanthropy, generating jobs, and many other ways we don’t think of). You are building a legacy. You will be respected.
You will be able to live the life of your dreams and not worry about money.
So, it’s very important to grow your net worth. It’s important to be wise with financial decisions. It’s important to be frugal. But, it’s also important to live your life.
Our search is for that balance, the balance between life and money!
With that, we have come to the end of this guide.
Let us quickly summarize the points we have discussed:
- Start a budget early
- Know (and track continuously) your net worth
- At least 10% of all you earn goes towards savings
- Multiply your money. Invest and grow your net worth.
- Understand credit and improve your credit score.
- Develop a Habit of Reading Personal Finance Blogs and Self Improvement Books
- There is a Limit to How Much You Can Save, But Not to How Much You Can Earn. Earn More!
- Do not compare yourself with others. Compare with yourself from the past.
- Start doing things early. Keeping financial affairs for later might prove dangerous.
- Learn to Think Thrice Before Making a Financial Decision
- Diversify Your Wealth
- Keep Track of Your Lifestyle
- Little Drops of Money Make a Mighty Debt (and Savings)
- Understand the Real Meaning of Assets and Liabilities
- Be Frugal, But Do Not Forget to Live Your Life!
I hope you had some takeaways from this guide.
Please do let me know your thoughts on the topic in the comments section below. Feel free to share any tips we might have missed.
Saving and budgeting are crucial money management skills to pick up. But, if you truly want to be financially independent, you have to build more sources of passive income.
Apart from your job, start a side hustle and start investing (you really should try to do these). This will increase your sources of income. And if you are looking for a side hustle, we recommend starting a blog. This blog started out as a side hustle, and is now one of our consistent sources of passive income.