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Personal Finance Basics Part 1 – The Basics of the Basics
Today I am starting a series on personal financial planning basics. In this series, I’m going to go over some of the main topics of personal finance – this will be a high level introduction to the topics that most people should consider when they first get started thinking about personal finances.
Today’s post will go over the very basic necessities – these are the things that you must think about for any basic financial plan. This is the bare minimum you should consider if you want to properly take care of yourself and your family. In part 2 of this series, I will go over some “optimizations” to the plan (hey, I’m an engineer, this is just how I talk)(no, not the kind that drives trains). These first two posts are to serve as the introduction to the topic. In future posts, I will get into more detail on each topic.
So, this is my list of the basic items needed for a financial plan:
- Earn some money. This is obvious; there is not much else to say about this (see, I told you these were the basics). If you don’t have any money then you don’t have any way to take care of yourself and you don’t really have to worry too much about any of the other topics.
- Give some of it away. Yes, you heard me right (read me right?) – the first thing you should do when you earn some money is to give some of it away. There are numerous verses to this effect in the Bible. God asks us to trust Him for our provisions and He asks us to prove that trust by giving some of our money away. How much? Well, I don’t know – that’s between you and God. The typical statement is to give away a tithe (10%) but that was a command given to the Jewish people in the Old Testament – I don’t think there is any specific number given to Christ Followers. So, decide how much to give and give it.
- Spend less than you earn. This is another very important concept that a lot of people in our society have unfortunately not mastered. You must not spend more money each month that what you have left after earning money and giving some to charity. Each month you do this, your personal net worth grows and you get closer and closer to the point where you have enough money to not have to work full-time anymore and devote your time and energy to other noble pursuits.
- Protect yourself. This means buy insurance. There are many different kinds of insurance that you may or may not need depending on your circumstances. The basic types are home or renter’s, auto, health, life, disability (long and short), personal liability, long-term care, identity protection, pet, travel, and maybe cell phone insurance. Insurance is a good topic to discuss and I plan on doing a number of posts on it in the future (I say "good" because it is confusing and almost everyone has a different opinion on it).
- Create an Emergency Fund. I guess this one is really 4b since you could view an emergency fund as wealth insurance. You should have some easily accessible money set aside for any large and unexpected expenses that come up. This is your Grandma’s “rainy day” fund. If you’re trying to get out of debt and stay out of debt (or stay out of more debt), this is your first line of defense. Some quick notes on it: a credit card is not an emergency fund. Don’t worry about exotic schemes to earn an extra per cent or two on your emergency fund – it should be liquid and very safe. There are multiple recommendations for how much money should be in the fund. That’s an easy question to answer – just make sure you have enough to cover the most expensive unexpected expense you’ll ever have and you’ll be fine. (Ok, so maybe it’s not quite as easy as I made it out to be) As a really quick answer, have enough in your emergency fund such that you can sleep easy at night not worrying about the next expense that is coming along. At the same time, if you have some debt that you need to eliminate, you will not want to store too much money in your emergency fund until that debt is gone (more on that in tomorrow’s post).
If you get these basics down, you are well on your way to creating a financial plan that will alleviate a lot of stress and anxiety around your financial situation. I know there are many other important topics to discuss, but I feel these are the most basic of the basic. Tomorrow I will go into the next steps necessary to complete your basic financial plan.
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Fantastic article! I wish more people would use the common sense ideas you are advocating. If we teach our children basics like this, we just may have a shot at getting this country back into financial shape again.
Gary – thanks for the very kinds words. I absolutely agree that it is vital to teach our kids how money really works before they are old enough to get themselves into trouble!