Success in Personal Finance comes from four pillars: spend less than you make, have emergency savings, diverse investments, and rebalance regularly.
Managing Money is Hard, Not Complicated
Pillars are an amazing piece of architectural technology. If you create pillars out of the right materials and place them in the right location, you can construct a building that will stand for thousands of years.
When building your ‘financial house’, it is important to build it with a strong foundation. If the recent economic uncertainty has taught us anything, it is that we all need to have a strong financial foundation to weather these kinds of storms.
To make sure that you are ready for the next economic hurricane, I want to share my four pillars of personal finance.
The Four Pillars of Personal Finance
So often, we get focused on random stuff that doesn’t really impact our financial lives. But, what we should be doing is ensuring that every move we make solidifies these four pillars:
- Spend less than you make
- Have emergency savings
- Have diverse investments
If you haven’t built your financial house around those four pillars, then it is like you’ve built in sand. No matter how big and secure you think you are, if you don’t take care of these four foundations, your house of cards could topple in the next economic hiccup.
Personal Finance Pillar 1: Spend Less than You Make
There is absolutely no way to get ahead financially if you spend more than you earn.
What are your goals? What are you working toward?
If you spend everything you make every month, then there is absolutely no way to make progress toward any financial goal. And, worse, you are at constant risk of financial hardship. Any little bump in the road will derail you completely. This is no way to live.
The best tool I know of to get your income and spending in order is the Undetailed Budget.
Personal Finance Pillar 2: Have Emergency Savings
By spending a little less than you make, you can build a cushion. This is your emergency savings. Most financial gurus recommend that you have 3 to 6 months of expenses in a separate account that is only for emergencies. And, I agree.
The best way that I know to build emergency savings is to find room for savings in your Undetailed Budget.
Personal Finance Pillar 3: Have Diverse Investments
After you have socked away your emergency savings, then you can start investing. Do not invest your emergency savings! After you have built your emergency savings, then you can build up a pile of cash to start investing.
I don’t own any individual stocks or bonds. Instead, I use ETFs and Mutual funds so that I can own and lend money to a wide variety of the most successful businesses in the US and all over the world.
For more detail, check out my article about how to use ETFs and Mutual Funds to build diversity into your investments.
Personal Finance Pillar 4: Rebalance Regularly
Investing is not gambling.
When you invest, you need to understand what you are putting your money into. And, it is just as important to know how each investment responds to different market environments. By building diversification into your portfolio you will have parts that do well while other parts underperform in each phase of the business cycle.
You will need a system to help you know what to do. It is in our nature to put our money into the things that are “doing well.” But, in fact you should be rebalancing regularly to move money out of the parts of your portfolio that are doing well and into the parts that are underperforming. That is because during the next market phase those two roles are very likely to switch.
The best method I know is to rebalance regularly to profit from all market conditions… even a recession.
Personal finance is hard.
It can feel like you are working so hard and steaming ahead, but then something happens and wipes out all of your progress.
To avoid having to restart, the best advice I have is to build your financial house on an incredibly solid foundation. Yes, it may take more time to feel like you are making progress. And, there are some very tempting short cuts bombarding us every day. But, the truth is that it is much easier to take your time and build your finances right one time than it is to be wiped out by something outside your control and have to start again.
2008 was one of the biggest and worst recessions of all time.
2020 has been one of the craziest economic years of all time.
There will be more shocks to the system. But, if you have a strong financial foundation, you will be ready.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.