Personal Financial Management
I am probably not that qualified but I think every one needs to tackle this sore spot and face it head on as much as possible. When I was in 4th year of my bachelors degree (senior year) I took a class called Investment Management, at the time I thought it was for easy marks until I realize how useful everything was even outside the class. I thought I want to share with you some simple financial management tips I learned over the years.
Disclaimer: I am not affiliated with any financial institution nor am I working for one.
Identify Your (Financial) Goals
“Know Your Limit Play within It”
Debt is a double edge sword
Identify Your (Financial) Goals
I would recommend you to figure out your goals, whether it is career/ lifestyle/ family - know what it is you want in the next 3-5 years and 10-20 years. This goes beyond financial goals - it goes to every aspect of your life. How? Well, if you want to become a Doctor, your first few years earning could be limited and depends on which specialty you decide to pursue - you may be in school and in debt for your 20s and early 30s. Or if you want to pursue a role in the creative field - you could run into more project based pay which means you get a nice lump sum for a project but it might not be continuous. What your goals also changes through out your life. Let say you decide to start a family in your 30s but that is very different than your goals in your 20s. Figure out what your 3-5 year (short-term goals are) and 10-20 (long-term goals are). Of course, depending on which part of the world you came from short and long term goals can mean different time periods. The 3-5 year for short-term goals are more for North American and Western European standards, while in many parts of the world that could be seen as long-term. Whatever time horizon it is, you need to know what you want for both short-term and long-term.
Why set-up long-term goals? See it as a clear goal to work toward and it can be as simple or as ridiculous as you want. Let say you put, I want to have a helicopter pad on top of my mansion overlooking the sunset boulevard. It is a bit out there, but if that is something you want - why not start planning how to get there?
How do you set-up a plan? You can easily open up an excel and put time horizontally across to see how much exactly you will need to achieve those goals.
My own example include saving up for my Masters tuition. My tuition was ~$100K CAD not including rent, living expenses and so on. But when I decided to go to school, I start calculating how to finance this goal and how long do I have to pay this all off. People often forget how important time is in financial goals. I have more than 1 year to pay the tuition, therefore I begin liquidating (turning things into cash) some of my investments (i.e. sold my car, stocks etc.) combine with my savings and put aside a certain amount of money from my paycheck each month.
“Know Your Limit Play within It”
I think this might be a trademark from the Ontario (Canada) lottery commission tagline, but I wholeheartedly agree with this statement when it comes to financial planning.
I am going to put on my Asian-mother hat and say, if you don’t make it then don’t spend it. Understanding what you have and what you can realistically afford is important. I also suggest putting in a rain-day fund because life comes at you unexpectedly and you need to prepare for it. There are many different kind of suggestions of how much that would need to be but I would say it all depends on what the lifestyle you want. The rule of thumb I go for is 2-3 months of gross (before tax) income in my account, sitting as cash (like money I can use right away).
Also, understand what the local tax and fee policy for your investment is important. Many people don’t do the math for the fees and taxes they need to pay for their investment gains and it ends up hurting them in the end. For example, in some countries the government incentivize you to save for retirement and build a program to reduce or eliminate tax on investments in these programs - you should take advantage of these programs however not put everything in because sometimes once you put money into these programs then it is very expansive to take them out again before retirement. Think before you commit.
Continuing from my example, things I have to research on is tracking conversion rate (as my school was not in Canada) and figure out roughly what my taxes will look like in the year I quit and the year I become a student. Setting up a personal budget for this change in lifestyle is essential for temporary unemployment.
Debt can be a double edge sword
As an Asian person, I have been brainwashed by my parents that debt is bad. As a business student, I am not oppose to debt at all - it can be way cheaper than anything else. Remember rule number 2: know your limit, play within it. A healthy amount of debt can help you increase credit score and help you take on larger debt when you need it in the future. What is a healthy amount, I am not qualified to say but from personal experience: if you can it payback without over stretching your pay-check too much. Too much debt can quickly turn into a massive snowball. Also, if the deal sounds too good to be true, then it most likely is a terrible idea. There is a reason why pay-day loans are a huge industry.
Finally from my example, taking on a line-of-credit which is loan you can use at anytime and would only get interest once you start using the money - kind of like a safety net, is important and you have to time in right. Taking it on while I was working is infinitely easier than when I become a student. However, I did not want to break the piggy bank until I absolutely have to.
I tried to share my thoughts on personal finances - of course this only from my own personal experiences. I think the three heading is broad enough to hopefully help you apply to your own situation. When in doubt:
Always, remember rule number 2.