Personal finances are a part of life that everyone has to deal with. Whether it’s paying your credit card, trying to save money, figuring out how much money to invest, or trying to minimize the amount you spend, personal finances are an important part of life, and if done right, can set you up for the future. It’s a struggle and something that takes time to get good at, like everything else, but will have a real impact on your life and your lifestyle.
The most important part of personal finances are the foundational fundamentals you have. These are the things you believe in, the practices you follow, and the agenda you’re trying to achieve. A lot of the way we handle finances is learned either through our parents, our own habits, or what we believe is the right thing to do. The foundation of a house is what holds everything together and gives it the support it needs to stay around no matter the conditions.
A lot of what the foundational fundamentals when it comes to money are all about the basics.
Revenue – Expenses = Profit or Free Cash Flow
The formula behind most of finance is revenue minus expenses equals profit or free cash flow.
Revenue is the amount of money you’re able to make or earn, it’s at the top of the line. The amount of revenue you earn or make is dependent upon the job you have, the salary you earn, the bonuses you receive, and the state of the economy or marketplace you’re operating in.
The amount of money you spend, or the amount of your expenses are taken out of the amount you earn. This deducts or reduces the amount of money you’re able to have for yourself, or that’s going to be leftover. This can be rent, taxes, insurance, spending money, food, vacations, or anything else you might find yourself spending on.
A lot of the expenses you have is determined by the lifestyle or the life you live. Depending on the type of apartment or house you rent, the type of car you drive, whether you eat out a lot or eat home, the type of clothes you wear, all will be major factors when it comes to your expenses. The more expensive, or the more luxurious type of things you go for, the more it’s going to cost you. The more something costs and the more you spend, that means less amount of free cash flow you’ll be able to choose to do whatever you want with.
The amount of cash or money you have leftover after your expenses will determine what you’re able to do, and what you aren’t able to do. This means if you have more money, you’ll be able to do the things that require more money. Things like buying a house, building a strong stock portfolio, creating a business, all require lots of money or capital. If you aren’t able to have a lot of free cash flow left over, then you’ll end up having less money to do the things you want to do, or less money to achieve the goals you want to achieve. And if you have less money, there will be things that cost money that you won’t be able to do. Which is totally ok, and fine, it all just depends on what you’re trying to achieve, and the life you’re trying to live.
Saving vs. Spending
Finding the balance between spending the money you make and saving the money you make is a crucial element of anyone’s personal finances.
Everyone wants to spend their money, experience the excitement or the exhilarating feelings that come with it. Whether that means going out to dinners, shopping, buying things you want, or the vacation you’ve really wanted to go on. All of these things cost money and take away from the amount of money you’re able to save. It’s important to enjoy, and not play on the extremes, because they are a dangerous place, so you want to do both, spend and save.
It’s important to keep in mind that each person is different. Everyone has different priorities, they have different goals, and they have different things they want to achieve. Depending on the person you are, the live you want to live, and the things you want to do, will determine how much money you’ll need to save in order to do the things you want to do.
But what the goal is, is to find the things you truly enjoy or appreciate and spend on them, while the things you can live without, or don’t value as much you can refrain from spending on. A lot of people have heard the term, a dollar saved is a dollar earned. What goes behind this saying, is by saving or keeping the money you make, you’re essentially earning it and keeping it.
Once money is spent, then it’s gone, all you have is the experience or the goods/services you purchased. The act of spending it feels good, but how do you feel after you’ve spent it? It’s a battle that everyone fights, and everyone struggles with. You want to enjoy the fruits of your labor, but you also want to prepare yourself for the future. Ultimately, you want to do both, have the best of both worlds, which you can.
The way to do it is by doing a little of each. Doing it slowly. Try and save a little amount of money consistently and try to spend a little of the money you have consistently. By moving slowly, and doing both, you’re able to get the best of both worlds. This you can be working your way to getting prepared for whatever might come your way and enjoying the time along the way. There will be times you’ll have to say or hold yourself from doing something, but that’s part of having both, the saving and spending aspects.
However you want to analyze it, whether it’s from an accounting vs finance perspective, something is going to have to give. Whether it’s the things you do, the things you buy, or the places you go, if you want to have the flexibility and ability to do things you want to in the future, or be prepared for whatever comes you’re way, odds are you’re going to have to save parts of the money you make, not spend it all.
Conclusion
The basics of finance are what things really come down to. The things that everyone has heard about and has heard a hundred times are the things that really have the most impact and meaning on people’s personal finances.
The simple formula behind all businesses is revenue minus expenses equals profit or free cash flow. This formula applies to you too. The more money you’re able to make, the more money you’ll be able to spend. And the more money you have leftover at the end of all your earnings and expenses, the more money you’ll be able to choose what you want to do with. The amount of expenses you have, or the lifestyle you choose to live will have a lot to do with the amount of money that you’ll have left over.
Finding the balance between saving and spending is what everyone is trying to do, each and every day. You ultimately want to do both. A mix of both saving for the future and spending to enjoy the present. Playing on the extremes of doing one or the other isn’t the best idea, because you start to gravitate towards one or the other, and it’s important to have both. Making the right decisions and deciding when to spend or when to save comes with time, and experience, and is something everyone, at every age has to constantly battle with.