The First Step To Build A Solid Financial Independence

Today I’m bringing you my second article on financial education 🌌. In the previous one, we talked about why is it important to invest and introduced the stock market, so please take a look if you haven’t.

Source: https://dilbert.com/strip/2008-01-31

Now, investing is not nearly as tricky as Dogbert tries to state. It is relatively simple. Let us recall an exert from Part 1:

[money] allows you to generate money using the money. If you don’t invest your money, it will never increase. You will likely spend, give it away or save it (and possibly spend it in a short-term wish).

If you don’t invest your money, it will never increase. That’s a foundation of investing. In order you to be able to invest your money, you first have to save it effectively. But first, how to save enough money to invest? We can try to apply some lessons from people that learned them the hard way — for instance, the Babylonians.

On The Richest Man In Babylon, George Clason covers the fundaments of financial education, using tales about the Babylonian. Pretty soon, he introduces some solutions for “empty wallets,” being my favorites:

1. One part of your gains are exclusively yours
2. Control your expenses
3. Do not live over your possibilities
4. Multiply your yields
5. Prevent losses
6. Make your home a lucrative investment
7. Guarantee a future income
8. Diversify your income sources

These solutions constitute a substantial basis for financial education. We will focus on the first two laws, in this article. Taking no longer, let’s jump right into:

Q&A 💰

What are the first two laws about?

The two first laws are the foundation of financial education. Simply put, you need to take away a portion of your income and set it aside only for being invested. Embrace the motto “money that is exclusively yours” and “pay yourself first.” You might have heard those before. This way, you can start directing your practices to follow a long-term goal, while not sacrificing your lifestyle. If you can live without some luxuries (that fancy sushi dinner will have to wait), you may raise the threshold of 10% to more interesting numbers (some people save 30%, 40%, 50% of their incomes).

This simple technique allows you to start building an impressive budget for investing. In theory, saving looks pretty lovely but…

…Have you struggled to keep 10% of your income? Did you think “wow, where did so much money so fast”? Fortunately, there is a fix. To enhance our saving potential, we should control expenses, by attributing “each dollar a job.”

To control expenses effectively, we need a budget 💰.

What is a budget?

A budget is an estimation of what you will earn and spend, over a specified future period. By being realistic and honest with yourself, you can come up with a realistic-implementable plan, that will allow you to save money.

Do I need a budget?

Can you tell exactly how much do you earn per month? And how much do you spend per month, on average? What about how much do you spend on groceries? And on fun money (such as going out, movies)? If you cannot answer, most likely you need a budget, to keep track of your finances.

Can you recommend me a method that tackles both laws mentioned?

Yes. A straightforward way to work is the following a few steps:

1. Get some money.
2. Give every dollar a job as soon as you earn your money (from the highest to the lowest priority). In this step, you have to divide your hard-earned money into categories, according to your monthly plan. When every single dollar is reserved for a specific purpose, they’re no longer up for grabs. By doing this, you will likely increase your control over the impulse to make unnecessary purchases.
3. Figure out your expenses (immediate obligations, education, fun). This allows you to prepare for the future and helps you to start preparing for those.
4. Apply corrections. If you spend more than planned on a certain category (sometimes we cannot avoid those extra $20 of sushi), you can take away from the budget of another category.
5. Keep track of your budget.

With this method, you will likely increase your control over your money. It will help you discover where you have been spending your money, and has the potential to make you realize facts about you that you didn’t know.

How to elaborate a budget?

Fortunately, we do not need to create excel files and waste precious hours to keep track of our money. As it can be complicated, I recommend you to use an application. You have several options, to mention a few: Monefy, Pocket Guard and You Need A Budget, being the last the one I use. It is free for students, which is excellent. If you are not a student, do not worry: at least they include a free month trial.

And what after?

After you create a plan and stick to it, you will be able to start saving. And that, my dear readers, is the first step to build a solid financial education.

Can you summarize the article for me?

1. Create a budget
2. Save part of your income every month (10% is a good start), to later invest.
3. At the end of your month, analyze your expenses.
4. Adjust your budget, if needed.

We reached the end of Part 2. You’re on the right track!

Do you think you need a budget? What tools/techniques do you use? Share that in the comments! 😁

Cheers, Keep Rocking 💪

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The First Step To Build A Solid Financial Independence was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.