Personal Finance: The Basics in One Blog Post

All personal finance begins with the person.  All people need food, water, and shelter to survive. All people want other things in life besides the basic necessities.

To survive on your basic necessities you need to have some sort of income. The income is the creation of wealth from less resources; whether this is receiving money for services and or time (job) or charity (foundation, government assistance, individual donation, etc).

Your income rate needs to exceed your spending rate for your needs or you will not survive. There are two sides to the equation. In coming (income) and Out going (expenses) are the sides and need and want are the insides.

Basic In-coming and Out-going Diagram

The actual income is not on the diagram because it can be applied to any income. If you can cut your cost on your wants or needs you will generate savings. The recommended starting amount is 1 out of every 10 dollars or 10%.
10 % of Wants Reduced to Generate Savings

This means if you do nothing more but save 10% you will have one year’s income in 10 years. This is the basic level needed to create financial security and wealth.

Savings to Invest
Once savings is established money can be sent off to investments. The investments can be sent to increase the savings and eventually cover wants and needs making working for income not needed.
 
Investments Help Build Savings
Investments Cover Expenses

Of course this is a high level simplistic view but the concept is the same no matter which income level you are at or where you live. The details of each category are defined by your individual situation.

The diagram is helpful to pinpoint where you want to work with first to improve your finances.

  • If you are able to lower your expenses you will not need as much money to have your investments cover them.
  • If you raise your savings level you will speed up the amount you can push to investments
  • If you invest a higher percent of your savings towards investing you will increase the total wealth over time

Anyway hopefully this is a good tool to get back to the basics.     

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