Did you know that 26% of UK residents who earn over £100,000 a year still live paycheck to paycheck?
Crazy, huh? Well, not really.
Managing money isn’t about how much you make. It’s about how much you keep. Many people never learned the basics of personal finance in school, leaving them to figure things out on their own…sometimes to their detriment.
The good news?
Personal finance isn’t complicated. If you master these five fundamental principles, you can set yourself up for financial success.
Budgeting: Telling Your Money Where to Go
A budget is simply a plan for your money. It helps you track your earnings, spending, savings and investments. Without one, it’s easy to overspend and wonder where your money went.
If you don’t tell your money where to go, you’ll wonder where it went.
Dave Ramsey
The reality is that no matter how much you earn, you can still end up in financial hardship if you don’t manage your finances properly (think of the 26% of UK residents who earn over £100k a year).
A well-structured budget gives you control over your money and helps you align your spending with your financial goals. The most common budgeting framework is the 50/30/20 Rule, which breaks down your income as follows:
- 50% for needs (rent, bills, food)
- 30% for wants (entertainment, travel, eating out)
- 20% for savings, investments and debt repayments
However, some prefer to swap the percentage allocated to wants and savings (i.e., 30% savings and 20% wants). This adjustment prioritises financial security and sets the stage for the next pillar.
Saving: Preparing for the Future
Savings are the funds you set aside for a rainy day. They protect you from financial surprises and help you reach your long-term goals. Without it, unexpected expenses can create unnecessary financial stress or send you into an avoidable debt spiral.
Do not save what is left after spending, but spend what is left after saving.
Warren Buffett
Think of savings as a safety net. They are like the cushion that protects you from the pains of a fall – you’ll still feel the hurt, but it won’t be as bad.
Why Saving Matters:
- Life happens: An unexpected medical bill, car repair, or job loss can spring up on you, but having savings makes a meaningful difference. Industry consensus for an emergency fund is 3-6 months’ worth of living expenses. But with the current economic climate, having more in there may not be a bad idea.
- Short-term goals: Want to travel? Buy a new laptop? A dedicated savings plan lets you achieve these goals without using borrowed money, especially the worst kind (to those who can’t use it properly) – credit card debt.
- Long-term security: Whether it’s a house deposit or retirement savings, starting early makes these goals possible.
Start small and stay consistent. Small contributions add up over time.
💡 Tip of the Week: Automate Your Savings!
One of the easiest ways to save consistently is to automate it. You do it without even thinking about it.
Less doing, more saving!
Debt Management: Avoiding the Trap
In business and personal finance, debt is a double-edged sword. While some types, like mortgages or student loans, can be beneficial, high-interest debt (credit card debt) can be financially crippling.
The chains of habit are too light to be felt until they are too heavy to be broken.
Warren Buffett
Credit cards and credit card debt are perfect representations of “one step forward, two steps back.” If you don’t stay on top of them, you can be in an even worse position than when you started…that interest will get you.
How to Avoid Bad Debt:
- Budgeting: Plan your spending and stick to it as much as possible. Always ensure your needs (your actual needs, not the wants you consider as needs) are taken care of – you can sacrifice some wants here and there.
- Saving: If you incur an unexpected expense, tap into your emergency fund. After all, that’s what the emergency fund is there for…emergencies. Don’t tap/swipe a credit card.
- Avoid lifestyle inflation: Just because you earn more doesn’t mean you should spend more. Keep your expenses in check and avoid unnecessary debt.
Want to learn more about debt and debt repayment strategies? Check out our post here!
Investing: Growing Your Wealth
Investing is how you make your money work for you. It involves allocating your funds to assets that increase in value over time. While saving is essential and wins the battle in the short term, investing helps you build wealth in the long run.
The stock market is a device for transferring money from the impatient to the patient.
Warren Buffett
Why Investing Matters:
- Compound Interest: The earlier you start investing, the greater the compounding effect on your money. Over decades, compound interest can turn small contributions into significant sums.
- Beats Inflation: Depending on the situation, keeping money in a savings account means it will lose value over time due to inflation (your money will buy fewer goods and services as time goes by). Investing allows your money to retain its purchasing power.
- Multiple Income Streams: Some stocks pay dividends, and most bonds pay interest. These additional income sources can reduce the financial dependence on a single paycheck. However, it takes some time before they can supplement your regular income.
Financial Mindset: The Key to Long-Term Success
Your financial habits and mindset matter more than your income. Even high earners struggle if they don’t manage money wisely. It’s not about how much you make but how much you keep.
Wealth consists not in having great possessions, but in having few wants.
Epictetus
Mindset Shifts for Financial Success:
- Delayed gratification: Learn to sacrifice some short-term pleasures for long-term comfort. The more you save (and invest wisely) now, the easier your financial life will be later.
- Don’t try to keep up with the Joneses: Many people upgrade their lifestyles as their income increases, leaving them just as financially troubled as before. Know yourself and what you value. Not because a Rolex is a societal marker of success means you must have one.
- Lifelong learning: Continuously educate yourself about money like you’re doing now. Whether through books, podcasts, articles, or newsletters, financial literacy is a lifelong journey.
Quick Tip: Surround yourself with financially responsible people. They’ll have a massive influence on your mindset and habits.
Rounding It All Up!
Mastering personal finance is not about how much you make; it’s about how much you keep and how well you manage it.
A budget highlights your potential spending before it happens, and savings are game-changers when life changes. Avoiding debt at all costs may be the sensible thing to do, and investing puts your hard-earned money to work hard for you. Having a financially responsible outlook brings them all together.
Smart money choices today = financial security tomorrow.
