Summary (for the impatient)

• Poor:
• Has no emergency fund
• Has no investment income
• Living expenses are more than the salary income
• In other words, constantly struggling; one pay check away from disaster
• Middle class:
• Has some emergency fund, may even be enough to coast for 6 months to a year
• Has some investment income
• Living expenses are less than (salary income + investment income)
• But, living expenses are more than investment income alone
• Good, but constant fear of sliding into poverty
• Rich:
• Has emergency fund to coast for 6 months to a year
• Has abundant investment income
• Living expenses are less than investment income
• Salary income is a nice cushion
• Investments are earning enough money even if out of a job

Introduction

If you are looking to understand personal finance and to get a bird's eye view of the concepts and topics before diving deeper, you've come to the right place! In this article, we'll look various aspects of personal finance, learn concepts, and proceed to articles that provide details.

Even though personal finance is a vast topic, understanding a few key areas in personal finance helps us easily get a hang of it and create our own financial success strategies. We already know about two such concepts: spending and saving. These two often seem to be at odds with each other. (We need to spend money to live the good life today, but at the same time saving helps us live the good life tomorrow.) And, as investing helps our savings grow muscles, we'll look at that also. Finally, we'll discuss debt. Though incurring debt is part of spending, learning to manage debt helps us understand both spending and investing. When done safely and intelligently, debt can be used as a vehicle to invest in assets that grow over time.

Let's dive in.

Spending

Our spending habits influence our personal finance more than anything else. Since spending is inveitable (we can't live forever on freebies), learning about the different tools and techniques available to us to manage spending — budgeting, smart spending, etc., help us in being mindful of where our money goes.

The article Benefits of Budgeting introduces us to, well, budgeting and introduces a few ways to budget efficiently. The article Smart Spending talks about ways to stretch our money further. Similarly, the article Lifestyle Creep goes over ways life conspires against us to tempt us into spending more than we need to. Finally, Understanding Credit Cards discusses credit card usage. Though the topic credit cards can be thought of as "debt management," we look at it here as credit cards are an essential part of every day spending for a lot of us.

Saving

if spending is our cool jetsetting aunt, saving is the serious and sensible mother that tells us to be careful! The secret here is that saving and being financially conservative earlier in life helps us be cool later in life.

The first article in this topic, Creating Emergency Reserves, discusses how we can create a little breathing space for ourselves if and when we are in a financial pinch. Knowing that if something happens to our finances we have some time to recover is key to getting our financial lives back on track. Next, we learn about Automated Savings so that our busy lives don't get in the way of our savings. Similarly, the article Creating Targeted Savings helps us plan and save money for specific goals.

Investing

Investing can be thought of as the next step of saving — helping our savings grow. In this section, we'll touch upon different ways to invest and point to articles that help us with our investment strategies.

The article The Power of Compounding describes how compounding and compound interest work. Understanding and internalizing this helps hugely in visualizing how our investments can grow. In the article Understanding Investment Types we learn about the different types of investments and to choose what's best for us. Then, Age-appropriate Investing shows us how best to invest for the different chapters of our lives. Asset Allocation and Rebalancing introduces us to the concept of correctly allocating funds to our investments to help them grow most optimally.

Stocks

Stocks are a specialized form of investment. Stock investing could potentially be a bit of a gamble and needs to be done under the guidance of a qualified and certified financial advisor. However, understanding the concepts involved and knowing what to look for and how to evaluate stock and their underlying companies is good knowledge to have.

The series of articles on investing in stocks starts with Investing in Stocks - 1: Introduction. The series offers a systematic way to analyze, buy and sell stocks, and can be used to invest in stocks with the assistance of a qualified financial advisor.

Debt

As we move through life we invariably need to make big purchases — purchases that cost more money than what we have at hand. This is where debt comes into play. With smart debt, we can borrow bigger amounts of money to buy and start enjoying assets and pay for them (i.e., clear the debt) bit by bit over time. This section discusses the different options available to us to get and manage our debt.

The article Understanding Loans introduces the concept of loans and describes how different kinds of loans work and differ from each other. Understanding Credit Cards describes the pros and cons of credit cards, which are a kind of debt, albeit very convenient and often invaluable.

As we collect debt, we also need strategies for clearing them (paying them off) over time. This is illustrated in Reducing Debt. Along similar lines, Mortgage Refinance talks specifically about reducing our home loan debt.

Strategies

One of the first steps in creating a personal financial independence strategy is to understand where we are, financially speaking. The series of articles starting with Financial Independence - Step 1: Introduction is a good place to start. The series takes us through the different stages of a hypothetical financial independence journey that we can tailor to our specific needs.

Miscellaneous

As we become financially independent, we often like to help others in need, just as we were helped by others. The article Giving Back looks at ways to give back.

Involving our kids in our financial decisions and teaching them to be money savvy is a good idea. Teaching Kids about Money offers ideas on how to do this.

Tips and tricks

As we create a personal finance roadmap for ourselves and start implementing it, here are several tips and tricks that we can include in our every day lives to make our journey both rewarding and fun. The list below lists a few such tips — it is definitely not an exhaustive list. Feel free to augment it with ideas from your own experience:

• Understand the difference between income and wealth. Generally, wealth is not taxed. Only when we convert wealth into income (example: when we sell a home or shares of a stock that has been increasing in value), any income (the difference between the purchase and sale prices) is taxed. (There always exceptions, so check with a qualified financial advisor.)
• Understand and make use of compounding wherever possible. The article The Power of Compounding describes this.
• Where possible, practice delayed gratification: frugality and thrift earlier in life (with occasional splurges) is better than being forced to downsize our lifestyle later in life. Plus, what we save and invest can grow compounded over the years.
• Establish good credit, even if you can buy everything you need with cash. Should the need to borrow a sizeable amount of money occur, the good credit will come in handy.
• Periodically check your credit score and make any repairs needed.
• Maximize work income:
  • When looking for work, learn about intrinsically high paying industries. For the same amount of effort, some industry segments have higher paying jobs than other segments. Consider both your passion and the financial rewards.
  • When selecting a job, negotiate for the highest salary the position offers for your qualifications and experience. This is because subsequent pay raises and bonuses are typically offered as a percentage of the salary. Moreover, when we apply for a new job in a new company, our current salary is often used as the baseline for the new salary offer.
  • Understand any overtime opportunities that the company may offer and see if you can benefit from it, time permitting.
  • Make use of perks (free food, free/discounted gym memberships, travel perks) that the company may offer.
  • Constantly hone high growth skills. Look around in your company/industry and learn about high paying skills and develop those.
  • Minimize taxes by taking advantage of tax-deferred investments (401K, health savings account, etc.). But, understand both the pros and cons of these for your specific situation before doing this.
• Study your tax returns to understand what got taxed, what resulted in tax breaks, how short-term and long-term capital gains are taxed differently, etc. Discuss these with a knowledgeable tax professional to learn how to maximise tax deductions.
• Always have at your fingertips an estimate of your wealth, your bank balance, your debts, and your monthly income/expenses. You should be able to say: I have A (dollars) worth of wealth/investments; my current bank balance is B; my total debt is C; every month I earn D (after tax) and spend E.
• As you spend money, learn to mentally classify any expense as short, medium, or long-term. The article Benefits of Budgeting describes this concept. This gets us into the habit of quickly checking to see if we're spending efficiently.

Summary

This article provided us a quick tour/overview of different personal finance ideas and concepts. These hopefully help us craft a specific roadmap and strategy for reaching our own personal finance goals.