Personal Finance 101

The road to Financial Awareness

Financial security is a integral part of our life. If you think about Maslow’s Hierarchy of Needs — which you can read as an individual’s primary needs, like food and shelter — Financial Security is included in the second level: Safety.

Maslow's Hierarchy of Needs

Everyone has their particular financial context. Not everyone has the same access to capital and financial flexibility. And we don’t all have to be pure-breed capitalists and live a life that is driven by money aspirations.

However, most people only have short-lived episodes of Financial Awareness. When realizing they need to save money for that car, vacation, degree … even worse, when a unexpected illness or financial struggle hits the family or close community.

The independence and the stability that comes with being financially aware can enable you to overcome past challenges, have a better quality of life and direct your attention to other personal priorities.

Being financially aware is a long-term commitment. It isn't something you commit to this week and you're set for life. You'll get better and more consistent results if you consciously decide to weigh in the financial aspect in every decision you make.

Sounds like a burden, but it's nothing more than a set of habits. The upside is that they can become so ingrained in your daily routine that it feels as natural and necessary as brushing your teeth before going to bed.

Regardless of your financial situation, the following principles can help you become more financially aware and make better, financially-informed decisions.

Monitor your Assets

Every car has a gas gauge for a reason. The same way you don't want your car to run out of gas half-way through the commute, it's never fun experience to running out of money.

Like the car gauge, it’s important to have your cash meter always in sight. Being aware of your assets and debts is crucial for the hundreds of micro decisions you make every day.

This also gives you clear boundaries: you know your lower-bound will always be zero, in the worst case scenario possible. However, as you earn and spend money, your upper-limit is regularly changing. Keep a close eye on that upper-limit — how much you have in total — and define your fictitious threshold for the danger zone. Whenever you reach the danger zone, you know you'll be running on fumes pretty soon.

Keep a close eye on your cash meter

Create a mid/long-term financial strategy

Even if you have to live from paycheck to paycheck, which a lot of people unfortunately still have to do, you’ll benefit from having mid or long-term financial strategy. A lot of people interpret financial strategy as having stocks, bonds or other types of investment. At the end of the day, your strategy can be as simple as having a clear list of fixed expenses and setting a realistic budget.

When you know your fixed expenses you are more conscious about trade-offs: should I really eat out 3 times a week and go to the movies every weekend, compounding to the current 1000 USD in credit card debt?

Trade-offs are difficult to make. Having a realistic picture of your financial situation can be scary. But it is a necessary reality-check.

When it comes to your personal finance, ignorance IS NOT bliss.

Plan: Think ahead of time

Think about how next week or next month, is going to be. Whenever we don’t have time, we tend to find last-minute solutions. Those usually involve throwing money at things to fix the situation. Most of the time, these quick fixes could be avoided it a bit of planning beforehand. And you could save good money in the long-run.

But it takes commitment!

No wonder hotels, flights, car and other reservations tend to encourage you to book them in advance. You’re committing. You’re putting money on their hands in advance for the benefit of a getting exactly what you want. Technically, you’re committing to that choice. And changing your mind will cost you more, you’ll be penalized for it.

Utility as a decisive buying factor: Focus on what’s essential

Sometimes it’s difficult not to buy the next new shiny thing.

Am I going to use this item every day? More than once a week? Is it just for a specific time of the year? Is it really essential or can I “wing it” without it?

I ask myself these questions every time I need to buy something. That’s mostly because I’ve moved quite a few times, and had to sift through all my belongings and figure out what was essential and what wasn’t. Since then, I decide to live a more conscious and minimalistic life. It doesn’t mean I don’t buy things like anyone else. The difference is that everything must have its clear purpose.

For instance, Christmas decorations are hard to resist.

They’re shiny, colourful and Christmas is a special a time in the year. But they're also temporary. In early January everything goes into a box and back to storage. If they had a utility and purpose score, it would be very low.

But I doesn't mean I can't have Christmas decorations and enjoy the season like everyone else …

Using utility as a deciding factor, I remembered that the Bonsai could make the perfect Christmas tree.

After all, it’s still Bonsai all year round. And cute Christmas tree in the Winter, one that requires little extra storage space.

It pays off to do the Math

As tedious as it may sound at first, it really pays off to do the math before you make a decision.

That also includes being aware of the baseline prices of the day-to-day items and resist the “SALE! SALE! SALE!” banners without doing the math.

Doing the math in advance might also show you don't need some of the little things that we take for granted. Probably you don't need that fancy <insert coffeeshop of your choice> coffee every day.

Back of the napkin style, if you drink $3.5 cup of coffee everyday, at the end of the month you'd be spending around $105 (3.5x30=105!). With the cost of a bag of coffee hovering around $10, which can last approximately 1 month if you drink one cup of coffee a day, in that same month you could have bought 10 bags of coffee just with how much you'd be spending at your favourite coffeeshop.

I'm definitely not saying that we shouldn't enjoy these little pleasures altogether.

Our days are filled with these micro-decisions, which most of the time seem harmless and almost not worthy of taking the time to analyse.

Doing simple calculations like these can help put things in perspective, which then gives room for more awareness and better planning.

Brainstorm with your Friends & Family

People are usually very shy when it comes to talking about money. Some people might take it as revealing too much of their personal life, their habits, or fear judgement. No one needs to know why and how they're spending their money …

It's a fair point. You the right to decide what is off-limits. You're life doesn't need to be an open book.

A good way to approach the subject of personal finance is from the perspective of sharing tips and tricks.

Ask other people how they manage their finances and deal with unexpected expenses.

Everyone has they're particular way of doing things. At some point every one tries different strategies and figure out what works and what doesn't.

Some couples and roommates split all bills evenly, others allocate fixed funds for specific expenses like rent, groceries and utilities. Other people contribute with a percentage of their income. Or split their income in three parts: day-to-day money, personal assets, and another amount to charity.

Discuss, learn and adapt what it make sense to your current situation.

Thanks for reading!

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Carolina Bento

Carolina Bento

Articles about Data Science and Machine Learning | @carolinabento

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