What is money and what role does it play in our lives?
- Gains: It all starts here
Pay attention, we didn’t say income. It seems obvious, but, to begin to understand the basic premises of administering our money, it is paramount that we have earned it. We all know examples of people with money who have never worked or, at least, never earned it, and the difficulties they have to value material things and other people’s time. It is much more likely that a teenager who gets an allowance for making an effort to study and help at home is more aware of the value of money than an adult who has been given all things for free.
Managing to diversify our profits is a strategy that can shield us from a possible recession or an unexpected event, such as the loss of our main source of income, and it will also apply when we talk about investments later on.
- Savings: Save at least 10% of your income
It is often said that savings are the basis of financial success. Having saved money is what gives us the ability to respond to unforeseen situations —whether it is sickness or unexpected charges —starting a business or engaging in learning. But it is important not to confuse savings with investment: while the first gives us peace of mind even in times of global economic crisis, investment can make our savings multiply, but it can also be a source of headaches and the cause of our loss of liquidity.
A dilemma we can have is whether to settle the debt or save. Everything will depend on the interest rate of this debt. In cases of high interest, such as credit cards, it is generally preferable to settle this deficit before saving, but in cases where the interest of the debt is low, such as a mortgage or even a personal credit, it is reasonable to save money at the same time the debt is slowly settled.
- Growth: slow, low risk; fast, high risk
A savings account has been the most traditional way of increasing our money, especially for the most conservative and risk-avoider people. However, due to the relatively low interest rates and the inflation that visits us much more often than would be desirable, other forms of investment are gaining ground, especially for a clientele increasingly erudite in financial matters and with a purchasing power relatively higher to that of previous generations. The supply of investment products is extensive and varied, with different levels of risk, and everyone must be aware of their financial knowledge and, above all, the amount of money that one is prepared to risk and lose, especially if the growth expectation is high and short-term. You must take into account that an investment manager may be a very good option when choosing a financial product that substantially improves the profitability of our savings.
- Expenses: Necessity vs desire
Of course, we will not save everything we earn, but we must distinguish between two clearly differentiated types of expenses:
- First necessity goods. This includes expenses on basic things we need to live, such as food, housing, electricity, water, public transport, amongst other things.
- Desires and superfluous things. Everything that is not strictly necessary, such as impulsive purchases, luxury goods, leisure trips, to mention a few examples.
Making this distinction does not mean that we cannot spend money on things we want but we do not necessarily need. Desire and actions that have no purely practical purpose are part of the human condition. We must therefore also allow ourselves this expenditure, provided that we adhere to a pre-established budget, be it weekly or monthly.
We will hardly be experts on the four pillars, but understanding each of the concepts, we have a much greater chance of controlling our finances so that we can cover not only our basic needs, but also the most expendable but often also necessary.