“How to save money” tips and guides often contain the same old advice. Most of these articles are focused on expenses generated by day to day activities and ways to minimize those expenses. While these do indeed help to save money and lower expenses the money saved is usually a small (though always meaningful) percent of our monthly income.
In this article I will focus on a different part of “How to save money”, a much more effective and meaningful one: The financial part. Simple budgeting, as mentioned above, does indeed help to lower expenses. But it is not an empowering tool. Using finance wisely in our lives can have a stronger and more meaningful effect then ever expected.
The following are 7 tips for better personal finance understanding and management:
1) Use the power of compounding interest – “The most powerful force in the universe is compound interest” Einstein is often quoted for saying. Every 100$ saved for 10 years with 10% yearly interest will be worth 2.5 times more. Save for 20 years and earn 6.7 time the amount.
2) Make long term diversified investments in stocks – the stock market has proved to provide the highest available return on investment – not without risk of course. This is where long term and diversification come to play. In long term I’m referring to periods longer then 10 years. By diversification I’m referring to investments across various industries, geographies and financial assets (stock, bond, ETF etc.). Further reading in these subjects is highly recommended.
3) Save early and often – Tips #1 and #2 above lead to tip #3. Start early and enjoy the full power of compounding and long term investments. These two forces of finance really kick in in the long term. For example: Saving 1,000$ annually between the ages of 19-25 (for a total of 7,000$) with an yearly 8% return will be worth approximately 30,000$ by the age of 41. If you start saving the same annual amount when you’re 26 it will take you 2.3 times the time, or 16 years to reach the same amount. Saving and investing early will enable you to invest in stocks for longer terms. It’s not easy saving in an early age but a consistent monthly deposit can help discipline you to save routinely and postpone satisfactions.
4) Plan and budget – Manage your personal finance and budget. Don’t be managed by the circumstances. Plan multi-yearly, yearly and monthly as much as possible (Things aren’t always under our control). Set ambitious goals. Managing personal finance is like micro managing a small firm financially wise. There’s profit and loss, a balance, cash flow report and capital investment changes.
5) Take the time to learn basic finance and budgeting – All the technical gibberish used by banks, insurance and investment companies, salaries and such are just that, technical. There are wonderful source for financial information on line. It doesn’t take a university degree to understand these concepts. As a matter of fact, most of the technicalities aren’t even taught in the university or college.
6) Implement all those other “How to save money” tips – Compare prices, postpone satisfactions, drive a bit slower, buy economic vehicles, think before you act and more. All common budgeting tips help achieve that periodical savings goal we set for ourselves.
7) Enjoy the fruits of your labor – Money is a means to an end. Never forget the end. Saving forever may amount to a small fortune but don’t forget to rip the rewards.