If you’re reading this, you’ve probably started exploring personal finance. You might have procrastinated over it for a while and now want to get a grip on it. I’ve been avoiding it for a time because I was overwhelmed by the apparent complexity of it. Until I realized how important and simple it is to own my personal finance. Until I realized that I wasted the opportunity of financial independence and early retirement just because I did not understand how important — and easy — it is to own my finance. Damn it. It’s not too late yet, but I will definitely not achieve what I could have achieved starting 10 years earlier.
I’m writing this blog now, so you can get it right faster than I did.
Why should I care? You want to live well without working for it. When you retire (late or early) or want financial independence, choose where, how much, and what to do for a living.
How it works: You build up an investment portfolio to a point where you can live from the returns, just like feeding a goose, so it will give you bigger and bigger eggs with time.*
What you need to do: You develop an investment strategy and own it.
- Set your goals
- Get transparency over your current financial situation
- Develop your personal strategy
- Set up your portfolio and savings plan
- Continuously optimize your income and spending
- Regularly inspect and adapt (if necessary) your investment portfolio
In this blog, I’ll not go into the details of the steps; I will do that later. I share the principles I follow to make my financial decisions in general. The principles here help me — and maybe you, too — in everyday decision-making. Please help to improve them by sharing your feedback!
9 Personal Finance Principles
1/ Know your goals
Your financial strategy and decisions will depend on your personal goals and needs. Know them, and you’ll be able to pick the right strategy for you.
2/ Own your strategy and decisions
Do not let anyone else make decisions that are essential to your life. Everyone has their own interest, which probably does not align with yours. They will make decisions that are good for them and might be bad for you. The same is true for any financial institution that is usually more interested in making money off you than for you.
3/ Know your investment assets
Also, when you know how your investments work, you’ll not have the nagging feeling that you’re not set up well. You’ll sleep better, even during a crisis.
4/ Consumption is not an investment
An investment is an asset whose value increases over time. Unlike a new car that massively loses value when you drive it off the dealer’s yard, education or assets like ETFs — if chosen well — increase their value over time. Taking a loan for a good investment is ok, but not for Consumption.
5/ Plan for the long run
“Compound interest!” was Albert Einstein’s answer when asked about the most potent force in the universe. It grows exponentially, meaning it grows slowly at the beginning and then takes off like a rocket. Take full advantage of it whenever you can.
6/ Diversify your investments
Putting all eggs in the same basket is risky; it might fall, and all of them are lost. So make sure you spread your investments over several asset classes (fonds, bonds, real estate, etc.) to minimize the risk of losing all if one of them fails.
7/ De-risk over time
The world might be in an economic crisis when you depend on living on your profits. At that moment, you want your investments to be as safe as possible. So balance your investment portfolio to become less and less risky over time. The quality of life for the rest of your life might depend on it.
8/ Don’t spend more than you own
Simple math: you’ll only grow assets if you earn more than you spend. And a loan is a debt, not an asset suitable for consumption.
9/ Avoid Lifestyle Creep
Don’t start spending more when you earn more. Just use the surplus income to invest to achieve your personal goals faster.
*Thanks to Madame Moneypenny for the analogy!
