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How To Build Your Personal Finances

"No one wants to get rich slow." -Warren Buffett

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Your personal finances need a strong foundation, not moonshot capital gains. This foundation consists of insurance policies and emergency savings. Despite the recent rise of online discount brokerage firms, you don’t need to be a day-trader. Stocks like TSLA and GME have received a lot of attention over the past month. Cryptocurrencies have had a volatile ride since their inception. Yes, there’s a lot of money to be made in the market. But without a strong foundation, trading exposes your personal finances to unnecessary risk. It’s called “speculation” for a reason.

Your foundation isn’t interesting, nor should it be. This is the prerequisite, the work that needs to be done before anything else. Start on the right foot, and you’re set up for success. Rush ahead and trade options with no savings, and you’ll fail. The most beautiful buildings in the world may spark joy, but they’re nothing without their foundations.

Protect What's Yours

First, you’ll need some insurance. If you own something valuable, you should insure it. Often, the government requires insurance policies. Houses and cars are the most commonly insured items. These policies protect your assets from unfortunate expenses. When a covered problem arises, the insurer will cover a large share of the costs.

If you think insurance is a waste of money, you’re mostly right. You’ll pay that premium bill every month and likely never file a claim. You’ll throw money away because you have to and receive nothing in return. Every year, your insurance company will get richer, while you get poorer. And it’s legally mandated, so you have little choice.

This is a best case scenario.

I’ve heard that insurance policies are like walls for medieval kingdoms. Much like insurance policies, walls are expensive. They take forever to build and require ongoing maintenance. And you might never need those defenses! What a waste!

Of course, everyone who argued against building walls will appreciate them when their enemies attack! Suddenly, the walls are a great plan. All the expenses and issues are small in comparison to the overwhelming benefit the walls offer. If the city had no walls, they would have saved some money, but risked everything. However, by building those walls, the city spent some money to protect the rest.

Likewise, without adequate insurance, you put your remaining personal finances at risk. Don’t think of insurance bills as an inconvenient expense. Those policies are the walls that protect you from absolute ruin.

Mo' Money No Problems

Second, you’ll need an emergency fund. This is another non-sexy brick in your personal finance foundation. Like all foundations, no one cares until there’s a problem. Don’t let that happen to you. Keep your foundation strong, and you can build as high as you want. Neglect your foundation, and nothing else matters because it will all fall down.

In early 2021, only 39% of Americans could afford a $1000 emergency expense. Make sure you’re in that group. It doesn’t matter how much you make if you spend it all. There are plenty of “rich” people living paycheck to paycheck. Set some money aside as a buffer.

Emergencies are rare beasts that can tear apart your finances.

  • House repairs (roof leak)
  • Car repairs (flat tire)
  • Health concern (COVID-19)
  • Technology loss (broken phone)

Unless handled right away, these problems will grow. If your car is down, and you can’t get to work, you might lose your job. Once you lose your job, your housing might be at risk. Don’t lose your car, job, and house because you didn’t have an emergency fund.

Most experts recommend an emergency fund to cover 3-6 months of expenses. You should keep this in a savings account for liquidity. Don’t gamble with this account, leave it alone. Don’t withdraw funds outside of a genuine emergency. Just set it and forget it. If you take care of your emergency fund, it will take care of you.

It will take time to save this money. If the pandemic shutdown affected your income, it will be an uphill battle. But your emergency fund establishes your foundation. Develop a habit of saving a percentage of your earnings on a regular basis. Little by little, your savings will grow.

Skip this step at your own risk.

Now for the good news!

Once you have enough insurance, and your emergency fund is solid, you can build your financial future. All that preparation takes problems off your plate. You’ll have fewer things to worry about, and reserves to handle whatever comes your way.

It’s time for some more exciting financial goals:

  • Vacation
  • Buy a house
  • Trading (stocks, options, crypto, etc)

Or, y’know, more rational financial progression:

  • Retirement planning
  • Pay off debt
  • Education expenses

You’re free to build whatever you want on the foundation you made. Some ventures are riskier than others, but your foundation will bail you out if it goes wrong. Update your insurance policies as your situation changes. Maintain your emergency fund at the appropriate level. That’s all you need to be financially stable.

The habits you develop while building your financial foundation will serve you for the rest of your life. After all, our lives are the results of our habits.

Spend Consciously: Turn money into more money, or expert knowledge to support your goals.

Save Regularly: No matter what, put some aside every month. Pay yourself first!

Stop Wishing: Wishes inherently accept that it’s not going to happen.

Start Planning: Plans break down goals into achievable targets. Make it happen!

It might feel like you’re starting slower than you want to. Everyone else is trading on margin, and you’re here moving 10% of your income to a basic savings account...

Yes, this is boring. Yes, this is slow. But it’s also solid. Take one step at a time and grow from there. Don’t worry about what everyone else is doing. When your personal finances have a strong foundation, you’re ahead of the game!