Personal finance is one of those things that if you understand early, can benefit your life for years to come. Getting it right in practice requires you to first integrate two major philosophies. Here is the balanced mentality needed in personal finance:
Discipline Through Saving and Investing
Setting up and allocating steady income to a savings account is crucial for your personal security. To some who are more frugal in nature, this is a given. No questions asked.
But for those who are a little more reckless with their spending habits, it might be a hard lifestyle adjustment to make.
If this is you, especially if you’re young, you need to imagine one day being on your own and tackling the responsibilities in adulthood. If you’re out of a job with no other means of income, how are you going to survive for the next six months to a year?
These are the questions you need to ask yourself.
To plan ahead is to save yourself from the stress that might present itself in life. Part of that plan requires having the discipline to set up a budget at the very least.
The 50/30/20 rule is a simple but effective example – see here for more information on how it works. At least you can rest assured that you’re doing what you can to set yourself up for not only safety in the event of financial hardship, but also access to enough money for big life purchases (like a downpayment on a house) or trips.
On the other hand, understanding the importance of investing your money is equally important. Rather than allocating all of your remaining income to a savings account that is just sitting there, you can also put your money toward assets or ETF’s that will make you more.
This will ensure that you’re expanding your potential income in the short term while also securing more income for the long term. In the case of an index fund, for example, your money will grow through compound interest over the course of years.
See here for more of an in-depth breakdown on a previous post of mine.
It’s a game of patience, no doubt, but at least you’ll have more than you otherwise would in later life.
To get started with index fund investing, I recommend Wealthsimple. It’s an app that makes it very easy to understand when your money is projected to grow through visual graphs, and offers options to automate weekly, biweekly or monthly withdrawals at whichever amount is suitable to you.
If you’re a Canadian citizen, click here to sign up at no cost.
Letting Go and Spending On What You Enjoy
Personally, I am more of a frugal person. I like to save and invest most of my money and, in in the past, avoided spending on things I didn’t believe I needed.
But now I give myself more of a break and even though I still don’t spend over my budget, I use my spending money on things I want.
This is because money is supposed to be spent, so the more you focus on saving all of it, the more you’re deviating from its purpose. And that doesn’t make sense in the grand scheme of things.
The takeaway here is to not overthink it if you have funds to spend. If you want something, remember that life is short and sometimes it’s okay to treat yourself. When you look back as you’re older, you will have been content that yes, you used approached personal finance with a balanced mentality, but also that you got to enjoy or experience what it is you like (that can be bought).
The Value in Both
Training yourself to have some financial restraint is unquestionably a smart move. That discipline creates personal security for the future while also helping you understand the value of discipline in itself.
If the way you do one thing is the way you do everything, then it only stands to make sense that you’ll also be disciplined in other areas of life.
Whether it’s with work, diet, fitness or other good habits, your life has serious potential to improve. I would say this is even more the case if you have bad spending habits but work to change that.
If you’re naturally frugal, however, then saving your money doesn’t require a lot of discipline.
On the other hand, spending your money when you want to treat yourself teaches you to not completely deprive yourself of your wants. As a result you can experience periods of joy and reward more often and that reminds you of your right to do so.
As with anything, a balanced mentality is important.