Can personal finance make you rich?

The usual motivation for a person to get started in personal finance is this: getting rich. I can totally relate. I personally had a similar idea when I read my first finance book, which is Rich Dad Poor Dad. I thought the main purpose of personal finance was to make you rich.

While getting rich is not the primary goal of personal finance, it definitely helps you get there. It covers topics that will aid in protecting and growing your money, such as saving, investing, and insurance. Furthermore, it also teaches about how taxes work, so you can optimize your income by reducing unnecessary expenses.

It has been almost a decade since I first stepped into personal finance and, guess what, I am still not “rich.” In fact, following certain teachers has even got me into debt! But I am not blaming anyone. It is on me. I take full responsibility for what happened. Yet, to be fair, it was also the knowledge I gained in financial management which ultimately helped me get back on track. I have weathered the storm, but there is still a long way to go.

What is the purpose of personal finance?

I hope I have not disappointed you. But being wealthy is only an aspect of personal finance. Riches are only a by-product of managing your money well. What it offers us is so much more.

Personal finance is meant to help you manage your money effectively. It provides you with the necessary techniques, tools, and knowledge to be able to take control of your finances. By managing your money well, you will be able to live a healthier lifestyle, as economic stress may cause physical, mental, emotional, and relational strain. 

Based on a report, the number one cause of stress is… you guessed it: money. I am sure you are already aware of the negative impacts stress can have on our bodies, career, and relationships. Nevertheless, the most damaging part of money-related stress is it puts you in a vicious cycle of mental health problems and financial difficulty.

People with financial problems are more likely to suffer from mental health issues. People with mental health issues are more likely to have financial difficulties. No one certainly wants to step on this hamster wheel. Yet, a survey conducted in the United States alone found 77% of its citizens felt stressed about their finances.

As surprising as it may seem, money-related stress has nothing to do with money. I can vouch for this. Despite being in debt since 2016, praise God, I am no longer worried or stressed about it. Why? Because I already have a plan in place. It will only be a matter of time before I pay off everything I owe. You see, my stress wasn’t relieved by money. It was alleviated by learning how to deal with my difficult financial situation.

What personal finance ultimately offers us is peace of mind — and that is something money cannot buy.

If it costs you your peace, it is too expensive.

Where to start in personal finance?

I appreciate you for staying. Most readers might have already closed this window by now. Financial management is not a topic many people find appealing — especially when they’ve learned it doesn’t guarantee riches. But you are different. I presume you are willing to give personal finance a go?

Understanding your financial situation is the first step in personal finance. The way to do this is to track how your money comes in, and how it goes out. In short, your cash flow. Your financial health will generally depend on whether you are making money or not. Thus, keeping an eye on your numbers is the most crucial task in personal finance.

The most basic way to track your cashflow

You can start tracking your monthly cash flow with a spreadsheet or with the good old pen and paper. Here is a basic template you can use:

I still use this template to this day. It has changed the way I handle my money and make decisions. If you want to learn more, I have written about this topic in detail as well as attached a free workbook in a separate post. You can check it out here.

Does personal finance cost money?

If you strip personal finance to its core, what you will see is that it is all about helping you make prudent decisions. All the data gathering you do is meant to serve as a foundation for your next move. But mere data is useless until it is applied with proper knowledge and techniques. Personal finance needs to be learned.

Generally speaking, personal finance is going to cost you money in one form or another. Learning to manage your finances properly will require you to invest in books, classes, and workshops. On the other hand, the absence of personal finance in your life can also result in money loss as it puts you at risk of making poor financial decisions.

Recommended resources

If you are looking for good resources on personal finance, here are some I could recommend:

Books

• The Total Money Makeover by Dave Ramsey
  If you are in debt, this is the book for you. You will learn how to pay your loans while still being able to support your daily life.
• Rich Dad Poor Dad by Robert Kiyosaki
  A must-read for beginners. This book teaches financial management in a simple and easy-to-understand fashion.
• Your Money Or Your Life by Vicki Robin
  Here, you will learn what money really is all about and how to develop a good relationship with it.
• Money, Possessions, Eternity by Randy Alcorn
  If you are spiritual and would like to know how money fits in the grand scheme of things, this is a must-read.

Online courses

• The Fundamentals of Personal Finance Specialization | Coursera
  Learn how to meet your financial goals by understanding the core personal finance topics.
• The Personal Finance Master Bundle | StackSocial
  A track to budgeting, creating more wealth and setting up a promising financial future.

How studying personal finance now benefit you in the future?

Money is something we all must deal with for the rest of our lives. Whether it becomes a blessing or a curse generally depends on how we handle it. Money is a tool. You will put yourself at a great advantage if you become adept at using it.

Understanding the topics of saving, investing, protecting, retiring, and legacy planning will benefit you in the future. They will teach you how to grow your money over time, as well as how to protect it from certain risks. Time is a vital ingredient to a healthy financial life. What you do today will affect your life for years to come.

Things to do for a more financially stable future

Here are five fundamental lessons you need to know to build a secure financial future:

Save money for emergencies.

Emergencies are unforeseen events that can happen in your life. We don’t intend to get ill or be involved in an accident. But if they do happen, it will result in significant medical expenses and loss of income. The money you saved in the bank will serve as a cushion to fund these unexpected circumstances. The rule of thumb is to set aside at least six months’ worth of your living expenses. You can extend it to a year if you live or work in high-risk areas.

Invest in long-term growth.

Once you have completed your emergency fund, the next step is to invest. Investing is the act of spending your money in hopes of future gains. Besides financial growth, one of the main reasons why we need to invest for the long haul is because of inflation. Inflation is an invisible expense. They are like these little parasites that chomp on our hard-earned money each year without us knowing. As of this writing, the inflation rate is at 3.6%. What this means is we are currently losing money at this pace due to the increasing prices of goods. The way to counter this is to invest our money in funds that will allow us to earn 3.6% or more.

If you want to learn about inflation. You can check out this post.

Protect your progress with insurance.

Imagine writing a book for the whole day and then your computer suddenly crashed. What you realize later on is that you forgot to save your progress. Eight hours of work flew away just like that. What if this happens to your assets? All the savings were emptied by a critical illness. The house was burned down due to a faulty wire. The kids can no longer go to college because their parents have passed away or become disabled.

Getting insurance is like hitting the save button. It can pay for your hospital bills, replace the amount lost in your property, and support your children until they can stand on their own. It is somewhat similar to building an emergency fund but on a much bigger scale. The ideal insurance coverage is about ten to fifteen times your annual income.

You can read my article about insurance versus investment here.

Plan for your retirement.

There will come a time when we can no longer do physical work due to our age. How are you preparing for it? One of the strategies is to build enough assets to cover our monthly expenses. Assets like rental properties, stocks, or businesses that don’t require too much physical strength to operate. Some people take their children as investments. They expect their kids to provide for them when they retire. Please do not adopt that kind of mindset. Our kids have no obligation to support us in old age. We will certainly be thankful when they do, but they are not by any means required. We should make the most of building our assets while we can.

Learn how to pass on your assets.

I haven’t gotten to this area of personal finance yet. I still don’t have much to pass on to my children. Legacy planning is something we should study as we build our net worth. It basically talks about the efficient ways to transfer our assets to the next generation — as there are costs and technicalities involved in the process.

Closing thoughts

I hope you found this post helpful. In a sense, personal finance is a way to make yourself happier and more fulfilled later in life. Start doing today what your future self will thank you for.

Sources:

• And the number 1 cause of stress is … money.
• Money and mental health facts.
• Survey: 77 Percent of Americans Stressed Over Finances

See also

• How Can You Apply Personal Finance In Your Daily Life?

Personal finance is the process of managing your money. It talks about saving, budgeting, investing, banking, insurance, tax, mortgage, retirement, and a lot more.

Is personal finance useful?

Many would think personal finance only looks good on paper. That there are no practical ways of applying it in our daily lives. Nothing can be further from the truth.

The primary use of personal finance is to make you aware of your numbers. This allows you to adjust your lifestyle based on your financial limitations. By doing so, it enables you to be more mindful of spending and make better decisions overall. In addition, you can also use your data to detect leaks, build credibility, and set more tangible goals in life.

6 ways you can use personal finance in your everyday life

1. You can set more tangible goals

Managing your money allows you to create a more actionable plan. It gives you actual data on which to base your goals. Almost everybody wants to be rich. But if you ask them, “How much money do you need to become wealthy?” they often cannot answer. This usually happens to people who do not practice personal finance.

I found myself in huge debt in 2016 and wondered how I got there. As I lamented over my ordeal, I sat down with a pen and paper to take inventory of my finances for the first time. I folded the sheet in half and drew a plus sign on the left column where I listed all my income sources. On the right, is a minus sign for my expenses. Lo and behold, here is what I found:

There were nine items on the minus side and only one on the plus side. I finally understood the problem and realized the steps I needed to do next. For a couple of years, I worked on cutting down on the minuses and adding more pluses. By 2018, here is what my journal looked like:

Today, I still continue to keep these two in check — always in the process of minimizing expenses and increasing the cash flow. Later, I learned these pluses and minuses are officially known as assets and liabilities.

We would all be like dogs who are chasing their own tails if we don’t apply personal finance in our daily lives. We work and work each day without really knowing whether we are making any difference in our bottom line.

Read the full story of my assets and liabilities journey here.

2. Use it to detect money leaks

Small leaks can eventually sink a ship. The same goes for our financial health. The most dangerous expenses are the little things we cannot see. A simple approach to personal finance similar to the table above can help us detect those leaks.

One of the latest leaks I found “harmless” were books and e-books. I generally deem them as an investment, so I buy every title that interests me. One day, as I was doing my accounting, I was surprised to learn I already owned 234 books — and most of them I haven’t read yet!

Just to be clear, there is nothing wrong with buying books per se. 234 titles are only a few for some. But the concern here is that I am only buying for the sake of buying — which is a dangerous habit. Because of that, I have decided not to buy any books until I’m done reading every title in my library. This was in 2019. Two years later, I have finished 107 out of 234 so far. Guess I won’t have any new books coming for the next couple more years.

3. It is a reliable accountability partner

One of the most valuable uses of personal finance is being a dependable accountability partner. Your records will not tolerate poor financial decisions. As long as you are transparent with the numbers you encode on your spreadsheets (or apps), it will, in turn, give you honest feedback about your overall financial health. It will help you make logical, rather than emotional, decisions. Now, it is no longer a question of whether I want it or not, but rather, can I afford it or not?

It has been seven years since my wife and I last traveled overseas. So we decided to plan a trip to Tokyo Disneyland and Universal Studios in Osaka sometime in September 2023. We have already started a budget and created our itinerary. Beyond the Covid issue, our financial management and everyday living habits will ultimately determine whether our vacation will become a reality.

4. It helps you build credibility

Taking care of your finances goes a long way. It will not only help improve your economic condition, but it can also aid in building trust with other people. Nobody wants to do business with individuals who have financial red flags. The way a person handles his money speaks a lot about him. Most institutions will ask for your bank statements before they engage in partnership talks with you.

I remember when my wife and I were shopping for brand-new kitchen cabinets because the old ones had been infested with termites. The owner, who is our friend, asks us when we are planning to replace them. We answered about eight to twelve months from now.

“How come?” he followed up.

With transparency, we replied that our budget still does not allow it, so we are saving up. He returned to his office and came back with a proposal stating we could purchase the cabinets on a PAY WHEN ABLE basis. Lalaine and I both looked at each other in disbelief. We thanked him and asked, “Why such a generous offer?” He replied, “Because I know I won’t have any problems with you guys.”

Sure, he is a friend. But he is also a businessman at the end of the day. This offer is unlikely to be extended to every friend he has. While we were humbled by his remarks, we ended up proposing a new solution where we could meet halfway. In place of paying when we could, we issued post-dated checks with the amount we could afford each month. 

5. Use it to teach your kids about money

I work at home. Whenever I do my personal finance, my eldest son is often there to observe. He is curious and asks many money-related questions — which I am more than happy to answer.

• Why are some numbers red and some are green?
• What is money for?
• How do people get money?
• Do we have a lot of money?
• Why do I need money to buy toys?
• Are there people who do not have money?
• Can we still eat without money?

As I answer each question, he begins to grasp the concept of money little by little.

My wife shared with me a story about her experience with the kids in a toy store one day. She said she was surprised when our son asked her this question: “Can we afford this toy mommy?” She was moved by his thought process, as she never expected a 4-year-old to be so considerate about our budget. Certainly a proud parent moment for us. 

6. You can tell your story through it

Numbers tell stories. What narrative can you see based on these figures?

These numbers narrate my debt-free journey. I had already paid off half by liquidating some of my fixed assets before I kept track of my progress.

• 2017 was the year when the grinding began. I started paying off my creditors from scratch.
• 2018 was a good year. As a result of a real estate deal, I was able to cut off a substantial amount of my debt.
• 2019 was not bad either. I started to get the hang of making money online.
• 2020 was so-so. Seeing Covid had begun to hamper some of my income sources, I began to look for new opportunities.
• 2021 was below average. Moving to a new house interfered with our usual debt payment budget.

At the moment, I still owe people Php 420,000 and I can’t wait till the day when I will be able to clear this debt.

If you are also in a similar situation, I hope you somehow find encouragement from this extra short story. And that is one of the most significant uses of personal finance. Your data will eventually tell compelling stories, the sort which others can learn from.

Closing thoughts

There are other ways to apply personal finance in your daily life, such as organizing bills, improving cash flow, planning for the future, and managing risks. Financial management is a necessary skill everyone should practice. This is essential to maintaining a healthy lifestyle.

See also

• What Is The Purpose Of Personal Finance? Not what you think