Personal finance is more art than science. It encompasses various choices that we all make about our money. It includes the information that we base those choices on, such as income and expenses. Our choices are based on our limited resources of time and money. The reasons behind our choices are entirely personal.
Whereas science is an effort to deduce laws that regulate the world around us, an art is an undertaking to create something new. What are you trying to achieve with your money? Given your income and the length of time you plan to spend it over (your lifetime), how much will you spend now and how much will you use later? Will you spend it on yourself, your family, or others? How much time do you want to spend managing it? Do you need to use it for survival, or can you build a legacy? All the decisions we make about our money inform these outcomes.
I have chosen to spend as little time as possible on my finances and to spend as little as is comfortable now, so that I can reach financial independence (not having to work for money) as early as possible. I don’t use a budget. I know how much I earn (as most people do) and I’ve developed some spending habits that keep me spending (well) below my earnings. I spend 15 minutes twice a year double-checking how much we’ve spent in the previous six months. I have set our credit card (just one!) to auto-pay, so it takes no effort to pay it off entirely each month. All our bills are also set to auto-pay. I have a home equity mortgage account so any “excess” cash immediately reduces our mortgage balance (earning more than a savings account). Just these simple things constitute our approach to personal finance. There is very little risk of running into trouble, because we don’t spend extensively. I also check our bank account balance and transactions as well as credit card balance and transactions every week or two, to ensure there are no surprises or errors. These are not rules, they’re just our style. They are simple and take little effort or time, which aligns with my choices.
Whereas personal finance is made up of a variety of simple actions, investing is a separate group of choices involving complexity and risk. Like personal finance, investing is more art than science. Some people seem to confuse personal finance with investing, in that they will search for answers to “how do I invest my money?” before ensuring their income and expenses allow some money each month to be saved and, eventually, invested. They seem to worry about the complexity and risk of investments, without first taking the simple actions that ensure their finances are on track. Once your finances are stable, you debt is under control and you have a cash accumulating, then it’s time to make choices about how to invest your money for the future.
This, again, relies on what you are trying to achieve. How much growth do you want, and how much variability can you stand in the possible outcomes? What causes do you want to engage your money in? For example, do you want to lend to people so they can buy a house, or do you prefer to participate in the development of new technologies? After getting all the above set up, I opened investment accounts and learned to invest. It has taken seven years, so far, and I’m still learning. Trading stock can be an expensive education, when you make mistakes. There are many ways to make money in the market and many ways to choose which stocks to own. Here again, I have my own style, which doesn’t even fit with all accepted rules of thumb. It is more complex and time-consuming than personal finances and there is greater risk of losing money. But it can also be more rewarding. Some months, I make more money in the market than I do at my job. I won’t be financially independent, however, until that’s the case every month.
Personal finance and investing, in my mind, are two separate arts. The first requirement is to know yourself. What are you trying to achieve and what are you willing to do to get there? The less you spend and the more you earn, the more you can save and the faster you move along the path. Most people expect a certain level of comfort, however, which constrains your savings rate. After you’ve addressed your cash flow decisions, the way you choose to invest your money will also affect the rate at which you progress toward your goals. The most successful investments will move you forward the quickest, while investment risk increases the probability of a setback. There are many people willing to give you advice, but remember that it is not science. Finding the style that suits you will make the journey most comfortable and increase the probability that you’ll arrive as planned.