Ever since I got out of school at the age of 22, I had always been fascinated with the subject of personal finance, which is simply the business of making, keeping and managing one’s money. To be out on my own and independent was a formidable thought for me, so I took it upon myself to learn about it as much as I could as a post-graduate exercise since my discipline was not in finance, but rather in software engineering.
What I found quite utterly interesting about personal finance was how so much of it was rooted in human psychology — how you control and manage your own affairs as well as how your actions interplay with the rest of society, as evidenced through the economic markets.
My family would tease me horrendously about how I probably would turn out to be the miserly old relative who lived in the creepy old house up a hill, who upon expiring would bequeath a grand estate that would stun heirs far and wide for its unexpected discovery and magnitude. Hetty Green, they said I was.
Well fast forward to today and I am no longer anything like Hetty Green though perhaps in my earlier years I may have conducted myself rather similarly. I learned a lot about finance since and the more I learned, the less compelled I felt to scrimp so hard given that my growing confidence in the subject alleviated what I felt were the pressures of handling it.
To this day, I look to the following recognizable tenets (aka cliches of the century) as a guide to navigating my fiscal life, a work still in progress:
- Knowledge is power.
The more you know, the less chance you will be scammed, and the more capable you will be of managing your own money. In the world of money, there’s nobody else whom you can trust more than your own self; after all nobody cares more about counting your copper pennies more than you do. Seek out free investment software and tools online that you may be able to peruse. Read a bunch of books or periodicals on personal finance, or visit the wonderful world of personal finance weblogs and other online resources! I’d avoid attending free financial seminars though, unless you can stave off hungry agents who are highly proficient at the hard sell or trained to go for the jugular.
- Pay yourself first.
Again, if you have many expenses and are promising to pay your creditors your first born child, treat yourself as the most important creditor there is. Find out what the best savings account is for you, then set up a regular savings schedule for this account. Earmark a certain amount for this Me, Myself and I Fund, and you may be surprised to find out how simple it is to build a rainy day fund or something even beyond that. I did this conscientiously and invested the amounts in mutual funds using dollar cost averaging and it turned out to be quite painless and extremely successful.
Buy low, sell high.
Never am I more thrilled than when markets tank. Okay, that may be an exaggeration (I do get nervous when the slide is deep), but I’ve actually always been a big contrarian so whenever any market or single issue takes a dive, I get rather giddy as it represents an opportunity to cherrypick value in the surrounding distress. This goes for any form of investment, whether it be in real estate, or in the equity or bond market.
“Concentrate” to grow your wealth and “diversify” to preserve it.
That is, if you concentrate your positions, you can potentially generate wealth faster assuming you are in the right end of a play. Conversely, you diversify your holdings in order to protect what you have. Whoever came up with this statement, I can’t remember for the life of me but I believe it to be great advice. Peter Lynch (the authority on “N-baggers”) preaches concentrated positions, while John Bogle (the master of indexing) preaches diversification. If you’d like to take a chance, go for it, as long as you think you can afford to lose your position with an aggressive trade. Simply going for broke on well concentrated portfolios is somewhat foolish unless of course you’re a true market wizard; I personally employ both strategies though on weaker economic periods, have preferred to diversify completely using indexed securities or funds.
- Things revert to the mean.
Markets tend to revert to the mean. That is the case when considering the long term. So if you are holding an investment long enough and are enjoying a massive gain, realize that it won’t be that way for too long so you better know when to pull the plug. If you are the average joe (read: not a market whiz as in previous point above) trying to make a buck out of playing the market, you can get lucky and be just like the dart throwing monkeys who have beaten professional stock pickers at their game. Or you can try this for the long term and suffer a fruitless quest akin to the search for Atlantis, so you are taking a chance by trying to beat the market.
- Don’t be penny-wise and pound foolish.
Take a hard look at your larger expenses and figure out how to control those. That’s where you’ll make a big difference in your finances, much more so than saving a few bucks here and there on discount soap bars or chewing gum, although I agree that small things add up. However, you can’t deny that by NOT overpaying to buy a house at the height of a housing bubble, you will save yourself an enormous amount of money for years to come which translates to several lifetime supplies of soap bars, dog food and chewing gum.
By following such prudent principles, perhaps before long you will have enough amassed to leave a legacy that will amaze your heirs…. and you wouldn’t have had to live like Hetty Green either.
This is a classic post by The Digerati Life. 🙂
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