Hello. This topic will be on money management and personal finance. I think that when it comes to personal finances and funds, one should consider the past, present and the future. Thinking of the past, present and future helps in visualizing how money is spent, how it is earned, the timing of earnings and purchases, how much money is being saved and how much money is being owed. It is also beneficial to be aware of the time value of money (TVM) and/or compound interest.
I wrote a related page on compound interest here.
Table Of Contents
Money and the Past
There are times in life when you should never look back but when it comes to money you may need to look back and see if there are any debts to be paid off. Compound interest can be viewed as interest on interest (snowball effect) over time and can work against you. The sooner the interest and principal (the original amount you owe/borrowed) is paid off, the less you have to pay. If debts get too large and out of control to the point where the debt cannot be paid off, then bad things happen (to the individual and maybe to the economy). Be aware of fees for late payments and other fees.
Examples of financial products where many consumers have debt or owe money include credit cards, mortgages and loans.
Debt happens due to credit spending, mortgages and loans. In other words, debt is created from the consumer with the get it now, pay later (because I do not have enough cash on hand or can’t pay cash) mentality. Debt is sometimes viewed as a negative thing but if the person is responsible with money and uses credit/debt as a tool to get something of value in the future and pay it back in time. then debt can be good. Examples of “good” debt can be mortgages, tuition loans, credit assuming that the debt is not really large and can be paid off in a reasonable time.
When it comes to the present time and money, you can decide how much to spend on loan repayment (if any), food, entertainment and so on.
Do be aware that every financial decision you make does impact the past and the future. For example, not saving money for emergencies can hurt in the event that the money is needed. Choosing to dine out versus cooking at home is a big cost difference and that money could be used for loan repayment or for savings.
If you do choose to use credit or start a loan, know that you get something now but have to pay (more) for it later. What you pay later is dependent on time, how much you owe, interest rates and so on. In other words, it is “not free”.
The future could be divided into the near future (next week/month), and the long-term future (2-3 years, 5 years, 20 years).
When it comes to money and the future, saving usually comes into mind. Saving involves setting aside a portion of money in the present for the future. Money is saved as there may not be enough money that the person has or be willing to be spend in the present. Examples of money in the future include:
- Saving Money For Retirement (RRSP)
- Emergency Fund(s) for Unexpected Critical Expenses
- Saving For Big Items/Travel
- Saving Money For Education (RESPs in Canada)
When it comes to saving for retirement or for education, financial products such as Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs) are sold to those who wish to have a financial instituion handling the money. These products typically have fees (monthly, annual, etc.) and those who invest money into the products expect the savings to grow because of compound interest over a long period of time. The types of RESPs and RESPs vary in interest rates, policies, time horizons, customer service from the financial institution.
Savings are important in the sense that if all the money in the present is gone, then the savings are there as a “backup”.
Allocation of Resources and Some Tips
Now that we have looked at the past, present and future of money, we can now consider how to manage your own money and allocating resources.
If someone spends every penny they have now in the present, then there would be no savings for future events such as unexpected accidents, retirement, child education and so on. If every penny is saved for the future, then nothing is spent in the present such as food, shelter, transportation and so on. If someone has a lot of debt and chooses to spend all of today’s money on past debt, then there is also no money to spend in the present moment and there would be no savings in the future. The solution to these scenarios is to find your own balance of spending and saving, and choosing how to spend the money considering the past, present and future.
I may not be a certified financial planner but here are some of my tips and considerations based on what I know through math and some financial math courses.
If you have lots of debt from the past, the number one priority is to pay the down the debt as soon as possible. When it comes to debt (loans, mortgages), time and interest rates work against you. Try to pay more than the minimum payments to reduce the debt faster. But also keep in mind, you need to spend on present items such as food, shelter, utilities, transportation, etc.
Once the debt is payed off you have financial freedom! The past debts do not haunt you anymore and you can focus on the present and the future.
Be mindful of the fact that some people are not in a position to save for the future as past debts and current expenses keep them financially restricted.
One popular budgeting strategy is the 50/20/30 rule. An example of an article which uses this is here. The 50/20/30 rule states that 50 percent of the income (after tax I would assume) should go to essentials such as housing, utilities, food, transportation, 20 percent of your income should go to savings in the form of emergency funds and retirement, and 30 percent of income goes to personal spending. I do agree with the categories but I think the allocation can be altered depending on your situation. You could do 50/30/20, 60/30/10, 45/35/20 and avoid something like 100/0/0 or 90/5/5. A fourth category named debt repayment could be made too. This 50/20/30 rule is an okay start but it is not optimal for everyone and in every situation. Go with what you are comfortable with and what gives you the right balance between spending and saving and considering the past, present and future.
Know the difference between your needs and wants. Needs have higher priority than wants. Needs include food, shelter, utilities, transportation and wants include luxury items (including certain foods), high-end products, vacations, coffee, dining out. If something is not really needed or used then that expense could be eliminated. The leftover money could be used for savings, investment, debt repayment, saving for a vacation and so forth.
Time, interest rates and compound interest can work for you assuming you have invested money into bonds, retirement plans, education savings plans and the like. Be aware of the risk vs reward idea. Lower risk on investment means that the investment is pretty safe but returns are low. Higher risk involves more uncertainty but yield more returns (in theory). Examples of higher risk financial products include stock options, swaps, forwards and futures.
There is the concept of “risk-free” such as risk free interest rates and risk free investments but I don’t really buy into that. An argument can be made that once money is invested, you no longer touch the money until it is withdrawn. Make sure that your funds are handled securely and watch your money.
You do not necessarily have to invest money as you can buy gold (when prices are low) and hope to sell gold back at a higher price (as an example). Other commodities include silver, copper, oil , natural gas, wheat and corn. Commodities can be used as an alternative to paper money. Paper money is affected by inflation/deflation while commodities are determined by the markets. Prices of commodities do vary like the stock market and their volatilities (uncertainties) are random (unless you track it using statistics).
Sometimes in order to make ends meet, households may have to adapt to the economy, downsize and cut unnecessary expenses. This involves a downgrade in lifestyle. Upgrading in lifestyle is easy but downgrading in lifestyle is not. A downgrade may be necessary to avoid debt and pay past debts.
I hope you have learned something from this. Keep in mind I am just one guy and I encourage you look at other articles and (Youtube) videos involve personal finance, saving, and consumer habits. When it comes to financial investments, go with a trusted professional who knows more about financial products, rules and policies than I do. Take care.