Basics of Personal Finance

As we approach the end of 2011, we must reflect about the accomplishments during the year and the areas that we could have done better. One area that I would like to encourage all of you that read my blog is to take the time to build a solid financial future. Just like when a builder constructs a house on a solid foundation to withstand the elements, you need to have a solid financial foundation. 

The development of a solid financial foundation are the same regardless if you make $25,000 or $250,000 a year. It is important that you understand that mastering personal finance goes beyond the development of a budget. Personal finance covers a sleuth of topics that range from budgeting, taxes, debt, insurance to name a few. It is also critical that you understand how these areas of personal finance relate with each other and its impact to your financial goals.

Today I want to share with you some principles or pillars that will help you develop a solid financial foundation for your family. The information shared here comes from my personal experience, many conversations with people from different generations over the last twenty years, and thousands of books read in the area of financial planning. One thing that came to my attention is that our grandparents and great-grandparents were much better at savings than the most recent generations. There is a lot of wisdom we can learn from them and we better pay attention if we want to get this country back on its feet.

The principles that I will share with you today are very basic, these principles are tested and true. However, over the years we lost focus and the results are known to us today. The financial markets and economic trends may come and go, but saving money never goes out of style. I invite you today to revisit these principles and apply them today.

1. Frugality - our ancestors were shrewed and frugal. We made fun of them, while the spending party was good and it did not seem to end. However, they had a better understanding about money and expenditure. They only spent on the important and critical things for their families, they focused on value. Here are some ideas from the past that you may want to apply to your finances today:

* If a "newer and cooler" version of something is released this holiday season, wait to buy it until the one you have no longer works.
* Teach yourself skills that expand your practical knowledge.

 

2. Accountability - The only way to gain control over your finances is by being accountable of the money spent. Our grandparents knew the money spent because they truly felt it in their wallets. However, today credit cards create a "swipe and reconcile later" mentality. This mentality also creates a disconnect between the expenditure and the accounting (or responsibility) for that expenditure. The "reconcile later" became more like I will "figure it out later". However, our grandparents had a more visual experience of their expenditures since it was a tangible experience.

What can you do differently today? 

* Avoid the excessive use of credit cards. Only use them when they are truly necessary.
* Learn to live within your means.
* Review your spending on a daily basis.
* Keep track of your expenditures.

3. Be Grateful - The generation that lived through The Great Depression experienced great challenges and learned to be truly grateful for everything that they had. The challenging experiences made them painfully aware of the potential for future hardships and what foolish financial behavior can cause to a family.

*  Stop the self-entitlement attitude: You only deserve what you have worked hard for.
* Nothing is free in life.
* Be grateful for what you already have.
* Be honest with your "wants" vs "needs".

4. Learn to Save - Saving does not make you wealthy. However, when savings have accumulated sufficiently they should be used to buy assets. Also, savings are used to create emergency reserves. Most of us know that we should save money, however doing it is a different story. It takes self-restraint, determination, and strength-of-mind to resist “keeping up with the Joneses” or buying the latest iGadget.

* Work on liquidity
* Create a reserve equal to three months of your household expenditures.

5. Patience - I am sure that you have heard “patience is a virtue.” This is a vital lesson in finance as well as in life. The desire for immediate gratification drove us into this current recession. When this trait is left to run out of control it will lead a person to financial ruin. The use of credit cards, combined with the constant temptations and enticements of advertising, provides the perfect vehicle for immediate gratification.

* Start teaching your children the gift of patience through the allowance given to a child. Teach them the principles of building a savings account and spending less than what they will need to buy what they want.
* Be patient in the implementation of your personal financial program. Don't expect it to magically disappear what it took years to make the mess.