Money.
A universally convertible mean that can be used to turn knowledge into justice, land into loyalty, humans into slaves, and much more.
An extremely poweful tool through which you can transform your wildest dreams or your worse nightmares into reality.
Money is something you must learn to control if you do not want it to control your life. Mastering its management is therefore essential to reach financial freedom and live life on your own terms.
Although money cannot buy you happiness, if used wisely, it can help you living a truly extraordinary and fulfilling life.
Money won’t change who you are; it will simply magnify it. If you’re generous, wealth will aplify your generosity; if you’re stingy, money will make you become stingier.
If you want to achieve financial wealth, you have to educate yourself.
A great starting point is the book “Money Master the Game: 7 Simple Steps to Financial Freedom” written by Tony Robbins, from which the content of this blog post is inspired by.
In the following, you will learn 5 tips on personal finance that will help you to achieve financial abundance and prosperity.
Let’s dive into them.
Clarify your financial dream
The first step to achieve any goal in life is to determine what that looks like.
Therefore, in order to begin your personal finance journey, you must define the type of financial dream you want pursue.
According to Tony Robbins (2016, p. 213), there are 5 kinds of financial dreams:
- Financial security: when your basic needs (i.e., your mortgage, food, transportation, utilities, and insurance) are paid by the annual interest earned on the return from your investments and savings.
- Financial vitality: when your basic needs and half of your monthly costs for clothing, dining & entertainment, and small indulgence or little luxury goods are covered by the annual interest earned on the return from your investments and savings.
- Financial independence: when your current lifestyle is completely paid by the annual interest earned on the return from your investments and savings. Since most people spend everything they earn, you can assume that the price of your lifestyle equals your salary.
- Financial freedom: when you current lifestyle plus a few significant luxuries (such as a boat, an extra house, monthly flight expenses, etc.) are paid by the annual interest earned on the return from your investments and savings.
- Absolute financial freedom: when the annual interest earned on the return from your investments and savings covers an unlimited lifestyle for you.
Calculate the price of your dreams
After defining the type of financial dream you want to pursue, you need to calculate its price.
This is equal to the amount of money that the yearly returns from your investments will have to provide you, which you can culculate by summing up your current expenses and all the extras that the returns on your investments should pay you yearly to achieve your financial dream.
Save money
The third step to achieve financial freedom is to save money systematically.
This is necessary to accumulate the capital that you will have to invest to get the returns that will pay your dream lifestyle.
An effective strategy to save money is deciding on a fixed percentage of your salary to save each month.
Independently of the percentage you choose (e.g., 8%, 15%, 20%), the important thing is that you stick to it, even when your monthly paycheck changes.
The best way to avoid the temptation of spending the money you’re supposed to save is to not see it.
Asking your company to send this portion of your salary to a separate account is one way you can achieve this.
Another strategy to ensure that you save money is to block your savings’ account.
Educate yourself
Although investing is what will eventually enable you to earn the passive income that will pay for your financial dream, before doing that, you have to educate yourself.
The 5 tips on personal finance shared on this blog post are a good start, but definitely not enough.
Be eager to learn more.
Invest in some money management books, listen to podcasts, watch videos.
To help you to get insights into some personal finances figures, I listed a few important facts and investment principles below.
2 Financial facts you need to know:
- 96% of actively managed mutual funds fail to beat the market (i.e., the index) over any sustained period of time (Robbins, 2016, p. 93).
- The average cost of owning a mutual fund is 3.17% per year (Robbins, 2016, p. 105).
8 Investment principles you need to know:
- Don’t lose money
- Take advantage of compound interest.
- Your earned income will never bridge the gap between where you are and where you want to be.
- What matters is what you keep, not what you earn.
- To have more, you have to become more.
- Your potential for financial success depends on your asset allocation (= your long term strategy for diversified invesing), market timing (= long and short term bets on the direction of the market), and security selection (the stocks you buy).
- Asset allocation is about the percentage of money you put in low risk* vs high risk/growth** investments.
- There are 4 possible economic environments: lower than expected economic growth, higher than expected economic growth, lower than expected inflation, higher than expected deflation.
*Low risk investment options include cash/cash equivalents, bonds, CDs (particularly interesting are market-linked CDs), your home (if adjusted by inflation, US housing prices have been flat for almost a century), your pension, annuities with 100% principal protecion and issued by solid banks, your life insurance, and structured notes.
**High risk/growth investment options are equities (i.e., stocks), high-yield bonds, real estate (including REITs), commodities, currencies, structured notes (those without 100% principal protecion or issued by non-solid banks).
Invest smartly
The last of my 5 tips on personal finance is to invest smartly.
Ultimately, financial investments are what will put your savings to work and enable you to achieve your financial dream, so you can’t skip this.
Although there is no one correct way of investing, I want to share with you some golden tips on smart investing based on the principles and facts I shared above:
- Prefer low-fee index funds over mutual funds. (fact 1) (principle 1)
- Beware of hidden fees in any financial product (especially mutual funds). (principle 1)
- Start investing early. (principle 2)
- Minimize your taxes, for example by living in a low tax state or country. (principle 2)
- Earn more by becoming more valuable to the marketplace through education and hard work. (principle 3)
- Build an all season portfolio, i.e., a portfolio that performs well in any economic situation. To learn how, read Tony Robin’s book or educate yourself on the internet. (principle 6 & 8)
- To optimize asset allocation, you have to diversify across time (i.e, execute dollar-cost averaging), markets, and asset classes.
Before you go…
Before wrapping up this blog post, I want to remind you that building wealth takes time, so please be patient.
Also, achieving financial freedom while feeling miserable is the ultimate failure, so make sure to always keep in your mind why you are trying to reach this goal.
Here are some questions that can help you to figure out this:
- What do I want to do with my life once I achieve financial freedom?
- How do I want to spend my money?
- How do I want to give back to the community?
Remember: happiness is about giving and contributing to something bigger than yourself, so make sure to reflect on this point when figuring out why your financial dream matters.
I hope you enjoyed these 5 tips on personal finance and I wish you a lot of success and fun along your journey ✨
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