Financial wisdom (I've learned the hard way)
When getting ready to write this blog post I was equally excited and scared. It not easy to admit you have always been great at something that might be considered an essential life skill. For those who were raised to know a lot about personal finances, be grateful to your dear parents for this. I was not and had to pick up information and wisdom along the way. This might take a bit longer, but I now feel I gain enough knowledge to be comfortable knowing I’ve got at least the basics and am building steadily from there. It’s hard to talk about money for a lot of people and so even the more reason to talk about it here. These are some of the things I’ve learned so far and a few tips to point you in the right direction should you want to learn more. With some fact facing, honesty, support and inspiration, personal finance can actually be quite fun and empowering. I have learned so much and enjoyed it along the way, so if I only get a few of you out there going on the right path I will feel very rich indeed.
This is the advice that's proven most valuable to me through the years:
1. Don't spend money you don't have
A lot of professional financial advice given starts with; "save before all else" or "pay off debt before all else". And those are very valid points to follow. The one thing I feel that every person should understand before anything else though, especially in this day of credit being so easily gained, is; do not spend money that you do not have. It sounds so easy, but can be quite hard to really internalize.
This includes up to a point more "harmless" debt such as being able to have a deficit on your debit account, borrowing small amounts from relatives and friends or a credit card that you pay off in full every month.
These ways can be useful if you really need them for an emergency (or to gain a credit score in the US). But they can also with time, easily trick you into thinking that your disposable amount of money is larger than it is. And, combined with living paycheck to paycheck, they make it's easy to get caught up in viscous circle where you never really catch up.
My advice, and an important lesson in my life, is to be very strict on this rule as it is one of the healthiest things you can do for your finances. If you need to use your credit card for things other than emergencies (hello online shopping and traveling), put away the money you plan on spending on your debit or savings account before spending it. Then spend that amount. I repeat, do not spend money, you do not have. If you need to do a "spend detox" for a few months to realize this system, do that.
The most important thing on this subject is learning how to “feel” when you are about to spent money you don’t have and to respect that boundary by stop spending. If you have unclear boundaries here, money you actually have and money you spend above that limit might not actually “feel” different to you. You may not have been used to having much money growing up, making spending money in general linked to guilt, or you might have been scraping by for a while without a budget and clarity about your finances. If you don’t know where your money ends and where debt starts, this is the first thing you need to figure out for yourself. And remember, there is an elegance to being able to say, if only to yourself; "I'm sorry, I just can't afford that right now".
2. Set yourself up for success
You have probably heard about the expression “living pay check to pay check” and perhaps felt either guilty of doing exactly that or slightly confused as to if that is something you are guilty of. Living pay check to paycheck is spending (and saving) the money you have between your salary pay outs. Looking at the money you have on your back account as your disposable income. If you want to break this way of dealing with money, will power might not be enough. You need to set yourself up for success. There are different ways of managing your cash flow. The most important change for me has been to start paying myself a monthly “allowance”. Make sure you have your saving and fixed payments set up in a way that works first. Set a goal for your savings. And only then, look at what you are going to give yourself as your actual disposable income a month. If you need different accounts to keep the money flowing as it should be, then look into setting that up for yourself.
2. You can always save something
When you are young and poor it might seem ridiculous that you could actually save money next to your expenses. But please do. Even if it’s only a tenner a month. Make a competition with yourself that you try to keep as much of your disposable income as possible every month and then transfer that amount to your savings account. If you get a raise, put that money straight into your savings account. Oh the riches I would have enjoyed now if I had only saved my spare change during the last 15 years. Jokes aside, it does add up. Not saving anything, is a very bad habit and you should quit that as well as smoking and not washing your face at night when you are past your school years.
3. Build a back up
Know that icy feeling when an unexpected bill shows up, or having to scrape by on loose coins and noodles during the final days before salary. I would lie if I claimed that hasn’t happened to me at least a few times. Sure you can ask your parents if you are so lucky that they can bail you out. But besides taking your vitamins and wearing sunscreen there are few things that gives as much peace of mind as having a financial back up fund at hand. Make it relational to your situation. If you are young and your costs are low, you might not need or be able to get together fund to cover the recommended six months of living costs. But you can keep a minimum of say (at least) 500 bucks to be able to bail yourself out should need be. Make sure the backup grows as your costs do. You are a big girl now.
4. Talk about money (to the right people)
Few things make people more nervous than talking about money. I sometimes feel people prefer disclosing what goes on in their bedroom rather than give details about how much they earn or what they paid for their car or property. Even when talking to our closest family and friends. Opinions may differ on where to draw the line here. I'm personally more on the, "don't discuss money at dinner please dear it's tacky" side when it comes to most situations.
I’m by nature a very private person. One thing I have had to learned though, is that as with most things, you learn much more and much quicker if you share with others. A lot of people remain uninformed about money, mainly because they are too afraid to and embarrassed to talk about it and the things they struggle with. By all means, be very discerning when it comes to talk about money at work or with acquaintances at a party. But do find one or two trusted friends and/or relatives that are willing to get real about discussing finances.
And when you do, ask the stupid questions and give full disclosure. You will learn a lot from hearing how other people have arranged their finances and the things they've learned on the way. If you trust the person, but the mere thought still gives you the hives, start with something in the range of e.g.; “I’m insecure of weather I’m spending too much on rent. Right now I’m spending about 35% of my disposable income, what percentage do you spend and what is your take on that?” This gives you a chance to get more comfortable before you dish it all out through the last cent.
I have one close friend that knows exactly how much I earn, what my latest raise was, how much I paid for my house etc. and vice versa. This has made me more confident that I ask for the right salary when job hunting and has taught me a few handy ways to arrange my finances that I wouldn’t have thought of myself.
Sharing might feel so great that you could start getting carried away. Remember though, your financial information is yours to share as you wish. The details about your partners and other close friends’ finances however, are strictly off limits to discuss at all times. Don’t be tacky.
5. There is a thing called "stupid frugal"
What is “stupid frugal” you ask? It’s being so cheap it actually prevents you from saving money down the line.
I'm not a cheap person. I'm certainly not wasteful or irresponsible with money, but I wouldn't call myself naturally frugal either. I used to be slightly surprised at what some people considered “too expensive” for a certain service or product. That fantastic night cream might be a 100 bucks but I can afford it now so it’s not that bad, what are people complaining about? I used to think.
That was, until I calculated how much of various beauty products and services I use during a year and the total cost touched four digit numbers. And I’m not even that high maintenance truly.
I now still spend on the things I feel I want in my life because they are worth it, but I definitely shop around to find the best price before purchase. Knowing how much of these “maintenance” things cost me during a year has given me more respect for my actual costs of living and made me realize that I just can’t justify, looking at my budget as a whole, to spend more than the amount I now reserved for this area.
I had never done the calculation of these more trivial things before as I found it a non-issue. Since I now know what and how much I want to buy, and what my budget is, I find it easier to buy in bulk when there is a great offer. I would have never done this before which for me is part of the definition of being “stupid frugal”. Buying things for a smaller amount as I run out, which gives the illusion of spending less in a certain area. The same off course goes for everything from groceries to dining out. Know how much you spend on different areas so that you can decide for yourself whether it is too much and how to get better value.
The opposite and yet somehow same theory applies when buying a more expensive purchase. It could be say a leather jacket or a new couch. If it is something you know that, finding the right level of quality and timelessness, you can keep for a very long time, going a bit higher in price will often give much more value in terms of durability. There is nothing more annoying than buying the slightly cheaper but still quite expensive version of something, only to have it break down after an unreasonable short time. Consider that, if you buy for instance a great timeless leather jacket, you might only have to buy one during your entire life (unless you have a leather jacket fetish, which is cool by me).
In this world of fast consuming, let that sink in. What are the products that if chosen correctly, you can enjoy for perhaps the rest of your life? That might give a new perspective on spending the 500 vs 300 euros/dollars/pounds. Remember though, expensive does not equal quality. More about how to recognize quality here>
The same goes for buying vintage. You might find 50 bucks for a side table “expensive” because you found it at a flea market where things usually go for under the 20. And it might be, use your common usense by all means. But also keep in mind what you would have to pay for equal or lesser quality if you bought the same thing new. You might be your own frugal enemy by turning cheap when you are actually looking at a great value. A wise woman knows when to bite the bullet.
6. Pick your saving battles
So when you have a good grasp on the money you view as your real disposable income and on your payments and savings remember, you don’t have to save, save, save on everything. Again, look at point 5 of “Stupid Frugality”. Life, and money should not be a punishment. If you decided something is important to you and you found reasonable value, then by all means go ahead and buy it. Love yoga, splurge on great classes. Love clothes, invest in your wardrobe. Just pick your battles when it comes to spending and when it comes to saving. If something is completely uninteresting to you but you still need it, then by all means haggle and shop around until you can pay the absolute minimum. If you love it and can afford it, live a little and enjoy being able to spend your hard earned cash on something you love and will feel proud of being able to buy for yourself.
7. Pick your side hustle/optimize your money making time
Nobody ever got rich from working a 9-to-5 is the common saying and there is a lot of truth to it. While me might not all be cut out to be super entrepreneurs there are things you can do to add to your income. First, learn to see your time and knowledge as the most valuable assets you have. Cliché but true. Then, look at what you can do next to your regular job to earn passive- or active income. Passive income could be investing, advertising income from a website etc. Active side gigs could be anything you like doing and are good at; makeup, coaching, writing, web-design etc.
Firstly, learn the basics about investing your money. There are resources out there and you need to know the basics. Get on it now. Realizing that there are alternative ways to earn money next to your regular job has also helped me look more critically at how much time I spend on my 9-to-5. What could I do with the two hours travel time every day if I could spend those on a money making side gig? You get the picture, realize that your time is money and start hustling for yourself.
If you want to learn more about money and personal finances these are some resources I like:
The Financial Diet is a Blog and YouTube channel run by Chelsea Fagan. It combines expert advice with community conversation and real talk about all money related issues. It’s hard to pull of giving money advice sometimes without seeming condescending but Chelsea keeps it personal and sympathetic. I’ve had so many flushes of recognition and actually learned a lot from watching the YouTube video’s especially. A good place to start familiarizing yourself with different money topics without feeling like idiot.
Podcast might not be the first thing that crosses your mind when you think about learning about personal finances, but I like the relaxed conversational medium and there are e few good ones out there. Try the Money Peach Podcast for getting started and the follow with Money for the rest of us to learn more about how your finances relate to global economics. Both are conversational and not dry at all. The Side Hustle Show and The Minimalist Podcast will inspire you to think differently about spending and earning.
What are your best money tips and hardest learned lessons? Share!
Image borrowed from here