We at Rice At Home have realised we neglected going into detail about some of the basics of personal finance which apply to people in all stages of their life and financial journey.
Whether you’re a university student with no job, or a 28 year old wealth manager earning £120K per year, there are some principles that apply to you both and are transferrable if you can build the habit and discipline of sticking to them. I am going to go into some of the principles I personally have picked up, and am applying in my life from the books I have read.
1) Have an emergency fund
No level of wealth insulates you from emergencies, speed bumps or unforeseen circumstances. Whatever stage of life you are in, you should have a storage of liquid cash that is dedicated to emergencies only. This rainy day fund should be built up as soon as possible. The amount in this fund will of course vary depending on the stage in life you are at, but my recommendation for university students is £500. For young millennials I suggest £1000. This insulation from emergencies will give you a lot of peace of mind in the arena of money, and I believe that you should prioritise having this fund before investment, other savings and in some cases, even debt repayment. No single emergency should be able to derail you from your wealth building plan, and if and emergency occurs, your top priority should be replenishing that fund Total Money Makeover – Dave Ramsey
2) Pay yourself first
One of the anchors of wealth building is developing the discipline to always pay yourself first. What does this mean? When you get your pay cheque, does this money all go to you? I propose that most, if not all of it simply goes through you. It comes to your bank account and straight from there, a portion goes to rent. Then a portion goes to house bills, your phone bill, the supermarket. Then some likely goes to some sort of name brand like Nike, or Balenciaga. You’ve paid your landlord, your utilities providers, your phone provider, supermarket, and favourite clothing brand. But have you paid yourself? I believe that everybody, no matter the size of the pay cheque, should save at least 10% of all they earn. Paying yourself first means taking this 10% out before paying anybody else, and then budgeting with what is remaining. This 10% should go to a sacred account separate from your emergency savings. Some people suggest this even goes into a Fixed ISA, where you can’t take any money out for a set term. My advice is to automate this payment so that you no longer even think about it. You are better able to afford this than you think. If you lost your job, you would tighten your belt and find a way to survive. Equally, you will find a way to live on 90% of your income. Not only will this help you build a strong liquid cash reserve, it will also improve your discipline and make you much more frugal with the remaining 90% The Richest Man In Babylon – George S. Clason
3) Golden Ratios
Now, as much as saving 10% is great, the goal should be to spend 50% or less of your income every month. This is the stage at which people really pivot into financial stability and from there towards financial freedom. We at Rice At Home define financial stability as being able to sustain your lifestyle for 1 year if nobody paid you a penny. The way you get to hit such a stringent target is twofold: first you must know how much your monthly outgoings are, and second, you must make them a smaller portion of the pie. There are 2 ways to go about this:
1)Trim the fat
Most of us don’t have to spend quite as much as we do. We buy clothes, eat takeaway 3 days a week, overpay for nicer housing. If we each look at our lifestyles, we will always find a way to spend less. The largest expenses tend to be housing and travel. For that reason, another suggested ratio is that the expense of housing is 30% or less. We advocate living with your parents for a reason, it can accelerate your wealth path by years. The other way to reach these ratios is to earn more. This doesn’t necessarily mean getting a raise or a higher paying job. You are likely better off picking up a second, more tax efficient cash flow. Learning a skill and freelancing is one example of this. If you channel your earnings from this through a Limited Company (seek a financial advisor or accountant’s advice on this) you can build a strong second cash-flow which is tax efficient and thus save more each month. The Money Code – H. W. Charles Set For Life – Scott Trench.
Next time, I shall be going into saving to invest, tax efficiency, credit and why extra income streams are paramount.
What can I do but get it popping?
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