Understand your money, create a budget, and take control of your finances

Your Money Magnifies You

Contrary to the opinion and philosophy of many, money is nothing more than a tool, a means of storing and transferring value. There are some people who give money attributes and associations that are not conducive with the reality of what money truly is, a tool to be used and leveraged.

This tool is best viewed as a mix between a mirror and a magnifying glass. Money is a mirror because it is a reflection of you. It reflects how you see yourself, what your priorities are, and what you value.

Money is a magnifying glass, because for most people if you gave them more money, no matter how idealistic and romanticized their self-perception may be, if given more money, they’re likely to do more of the same things that they are currently doing.

So this means that money can either be a tool to help you achieve your financial goals, and provide you the opportunity to life a life of luxury (as defined by your personal values). Or it can work against you, by way of financial ignorance, and intellectual neglect. Given that you are here reading this article, I think it’s safe to say that you are likely interested in money working for you and using money as a tool to make your life richer and more fulfilling.

Building wealth, and enjoying the “fruits of your labor” stem from first understanding where your money goes and constantly learning more efficient ways to use it.

What Does It Mean To Make Your Money Work For You?

Your money is your employee. let me say that again. Your money is YOUR employee. Which means that you are in charge of what your money does, (or does not do). Like any good employer, it is absolutely vital that all employees are working for the best interests of the company. The same should said for how you view your finances. The money in your possession should only be used for the best interests of your “company” (aka your life).

So it would be wise to make sure that your employees are all on the same page, working to make your life as pleasant and stress-free as possible. Being that you are fully in charge of your finances, using your finances to continuously improve your financial stability and security should be the top priority.

As much you may visualize and dream about multiple streams of income, not having to work a 9 to 5, and travelling the world on sailboat (which doesn’t sound like a bad idea at all), financial independence is near-impossible without proper financial literacy. Building wealth, and enjoying the “fruits of your labor” stem from first understanding where your money goes and constantly learning more efficient ways to use it.

Budgeting basics

Budgeting is to the world of personal finance, what flossing is to oral health. Everyone knows about it, everyone knows what it is, everyone claims to do it. But the yet the dentist (your bank account at the end of the month) seems to always disagree that it was done well, if at all.

So let’s define what a budget is, without defining it. A budget is a financial prism that can be used to change the way you perceive the usefulness and allocation of your money.

Effective budgeting is predicated on understanding the flow of your money., think of it like the supervisor at work. The same way your supervisor (should) be making sure that everything that needs to get done is being accomplished, your budget should act in the same manner (if used correctly). In order to budget properly, it requires you to be intentional and deliberate about where you allocate your money. And in so doing, you are better able to account for all the necessary financial obligations, which in turn reduces impulsive spending.

The goal of budgeting is to always spend less than you earn.

When creating a budget, assign every dollar you earn a “role”. Some roles may include:

Managing reccurring expenses
Eliminating debt
Paying down long-term expenses
Saving for leisurely experiences
Long-term investing

Budgeting is not a one-time action. It should be something you actively engage in every day, if not, then every few days. this way you can stay on top of your expenses and finances in general. You may need to adjust your budget from month to month to account for large expenses or your own spending habits.

Tracking your finances helps you be aware of what you have coming in, and where it needs to go. Being deliberate and intentional about how you use your money, enables you to life a more rewarding life, because you know that you have prepared and accounted for all possible contingencies, from fairly-major car repair to an impromptu dinner with friends. This is the first step towards making your finances truly work the way you want to, rather than feeling controlled by your finances.

Debt is no friend of yours

For the purposes of this article, debt is never a good thing. Yes there are exceptions and extenuating circumstances. (To modify a quote I heard from a religious leader talking about sin) Debt will cost you more than you’re willing to pay, keep you longer than you want to stay, and from your original destination, take you farther away. Even though the original context was in regarding to morality, the concept applies very well to debt.

When you accumulate debt, you end up paying more than the original cost of the item due to accumulated interest. and as a result you likely pay mainly interest on the debts especially if you only pay the minimum (more on this in a another article). This increased likelihood of paying primarily only on the interest is how debt will have your money working against you, because it cuts into your income and allocation for other (more pleasant expenditures).

Once the debt is paid off, the newly-freed funds can now be spent on other things. Whether that be a bottle of wine, a nice dinner to celebrate, or automatically re-allocating it to other financial goals. (of course I’m all for being methodical and highly efficient with finances but an affordable night out, is no financial crime). As long as the mini-celebration does not end up jeopardizing your financial stability/goals, and you get right back on track, I have no objections.

Now that the debt is paid off, and you enjoyed a reasonable celebration, it’s right back to financial discipline. So those funds need to go to where they will be best utilized. For example, saving for education, creating a retirement fund, traveling, or improving your living situation. If those goals are already accounted for, consider ways to grow your wealth and create more financial stability and independence via starting a business, or investing it.

Be ready for an Emergency

Surprises are not only scary, but also immensely stressful when you do not have control of your finances. An unexpected car repair, a medical procedure, a job loss, or any other financial emergency can quickly send you spiraling into new or more debt, wiping out any progress you've made towards taking control of your money. Which can set you back months if not years, with your financial goals.

Hence the ever-present to create and maintain a emergency fund. Though it may not seem like it, this is another way to make your money work for you, because it allows you to be prepared for unexpected situations. Which reduces the likelihood that you’ll go scrambling for debt as a way to take care of the circumstance.

An emergency fund’s primary purpose is giving you peace of mind that you are in control, even when you are in a difficult situation that may not be of your own doing. However, this takes time, and in some cases, lots of it. Ideally, you should have three to six months of income saved to hold you over if anything happens. If you’re just starting out with an emergency fund, an consistent amount you can set aside helps.

One way to maximize your emergency fund is to put it in a high-yield savings account (which will be discussed in detail in another article). The main benefit is the interest earned in this type of account is higher than a regular bank account. This means the money you save will make money while it’s in the high-yield account.

Once debts are paid off, the excess funds can be used to increase the allocation toward the emergency fund.

Invest, invest, and invest some more

Once you have freed up all that extra money from paying off your debts and maximizing your emergency fund, you can put your money to work via investments. The investment goals you choose will depend on your personal priorities, lifestyle, risk assessment and other important factors.

In addition to a healthy emergency fund/savings account, you will also benefit from establishing retirement accounts. Other accounts/funds that you may want to consider are:

Education savings,
A fund for travelling and experiences
A house-purchasing fund
Extracurricular fund for dependents
Long-term care savings, for yourself or dependents

It may seem like overkill to have so many funds, and yes some of them can be consolidated if you see fit to do so. However, I list them to emphasize that there are many reasons to have money set aside. It makes it easier to have peace of mind while travelling knowing that you’re only using funds from the “experiences fund”. And as mentioned earlier, these funds can be leveraged by being created with high-yield savings accounts or other low-risk investment vehicles.

Remember, when you pay interest, you are losing money. But when you earn interest, your money is making more money all by itself. And the longer you can leave the funds untouched, the better your returns will be once you finally decide to access them.

Investing is so beneficial because it is a great way to have your money work for you via interest. Which means that if you invest consistently, your money will begin to grow on it’s own. Some investments also pay dividends, which you can either take as extra income or reinvest to help your portfolio grow. The secret is to invest as much, and as early as you can to maximize your opportunity to enjoy financial freedom sooner!

To be clear, investing is a long-term strategy for building wealth. No matter what the medium of investment is, investing is primarily a ling-term method of growing your wealth. As with most things in personal finance there are exceptions, and the same is true with investing. However, for purpose of this article, the primary function of investing is a long-term way to accumulate wealth, if done correctly. (Investing will be addressed in detail in another article).

One important aspect of smart investing is to diversify your portfolio. Having all your money in just one type of investment increases your risk. Which in turn means that if that investment falters, you could lose most oor all of your invested funds. Instead, spread that risk out by investing in a mix of:

Stocks
Exchange traded funds (ETFs)
Various bonds
Mutual funds
Real estate
Business (your own or someone else's)

With all the options for investing on the market, there is certainly a platform for all budget sizes. While many larger institutions may have a considerable minimum initial investment, there are many apps and platforms that allow for significantly lower minimums and in some cases even allow fractional shares.

No matter how you are saving or investing, have a specific set of goals. Know what you are working towards, like paying for your child's education, purchasing a home, or early retirement. This will help focus your spending and give you motivation, as well as helping you decide what types of investments are the best for you.

THE BOTTOM LINE

Your finances are yours. You are solely responsible for the state they are in. And as such it is squarely on you to learn how to properly budget your money, so you can ensure all your financial obligations are met and you still have enough discretionary income to enjoy treats.

Debt is another thing that must be understood and accounted for. It’s impact on your finances may not be glaring and obvious at first glance, however that is no reason to neglect knowing how much you owe or what the interest rates are.

Being ready for emergencies and investing are the last were discussed in this article and both topics are important to having a balanced approach to finances. In regards to having an emergency fund, it allows for peace of mind knowing that you have a cushion in the event of unforeseeable circumstances, and regarding investing, that is a way for you to gradually grow your wealth and financial legacy.

Understanding Budgeting & Personal Finance