It is never easy when it comes to personal finance. We always want to “make more” and most of us are not really sure where all money went by the end of the month.
COVID-19 crisis also revealed that around 60% of the population have very little to no savings at all. This has led to many difficulties to keep the habitual comfortable lifestyle with a decreased income. On top of that, in 2020 there was a record growth of new brokerage accounts around the globe. However, not everybody used an opportunity to enter the market and make a good fortune on the March drawdown.
All of that is connected by one simple factor – financial literacy. This is why I was invited by Femme Palette to share some tips about the first steps in personal budgeting and investments.
Lesson number 1: Wealth formula.
There is a simple rule to become rich – spend less than you make and invest what you save. In other words, the wealth formula looks the following:
Where Delta is savings, multiplied by the number of years (invested)
The ideal formula says you should be saving half of your income. Something to strive for!
Obviously, the opposite, or so-called “bankruptcy” formula is when your costs are greater than your income, makes us think if an occasional usage of the credit card could become dangerous for our financial prosperity:
Lesson number 2: Become an Investor, not a Consumer.
If in 2008 instead of buying a new iPhone 3 for $199 you would invest it, today you would have around $8000 with an annual return of 32.48%. This can be used not only in regards to Apple products' overconsumption but also to many other things we consume instead of investing this money.
Lesson number 3: Pay yourself first.
After getting our paycheck we tend to “pay everybody” – our landlord, Netflix, and many other individuals or companies. What about paying future-you first? If you are dreaming to retire at 45 , spending the rest of your life by the sea you will need to start with 10%, you will not even feel it, and gradually increase it to 50% and more.
Lesson number 4: Inflation is a financial ignorance tax.
This is a great achievement to start saving, and indeed the amount of 3-6 months of your expenses should be in cash. However, it is not good to have all your savings in cash due to the biggest wealth enemy – inflation. Learn how to invest and use the price increase in your favor.
Lesson number 5: Compound interest is the eighth wonder of the world.
Albert Einstein reportedly said it. “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” To revise the previous statement, learn how to invest and use the price increase AND the compound interest in your favor.
I hope that these simple rules will help you realize that personal finance and investment is simple and fun. If you have any questions, please get in touch with me and send your questions.
Interested to learn more about finances and investing? Check the Investing 101: Managing your money webinar that Elena put together for the community.