Personal finance coverage in formal education 📚 is very low whereas poor personal finance hygiene can have a massive impact on your life.
Many of my friends have above-average incomes (engineers, consultants, entrepreneurs...) and yet have a history of bad decisions about their personal finance.
Below, you will find the key points that are guiding my personal finance decisions.
Know your figures!
If you don’t have a good estimate of how much you spend on food 🍏, insurance (house and car), taxes, leisure, clothes, etc. Then you’re missing something.
Do you spend ~400€ a month in food or ~200€?
You’ve to know your figures to know your saving capacity 💰!
Pay you first
Once you know how much you can save every month, set up a recurring transfer every payday that removes it from your credit card account 💳. Money staying available in your credit card account has the unfortunate tendency to disappear without anyone realizing it. Afterworks, steam sales... there are always tempting purchases.
Managing your money availability is key to improve your saving power.
Expect the unexpected
A car breakdown 🚙, a water-heater that stops working, a layoff... Life is full of surprises.
The first thing to do, before investing, is to build a 6-month contingency fund. As its name suggests, you must deposit in this fund the equivalent of 6 months of expenditure.
Obviously, this fund has to be extra-liquid. Once again, managing your money availability is key 🔑.
In my opinion, investment vehicles have several key features you have to think about:
- 💧 Liquidity: How fast can you withdraw your money (instantaneous, few days, months, or years)?
- ⚠️ Risk: Is your capital guaranteed? Is the value of the underlying asset volatile? How the underlying asset is perceived by society? How the underlying asset is perceived by the government?
- 💵 Expected return on investment: What annual returns can you expect?
- 🔧 Leverage: Can you borrow money to invest? When you invest can you lose more than the initial capital?
- 🛢 Category: What’s the industry behind the underlying asset (Healthcare, finance, Real estate...)? What’s the geography involved (World, Asia, Japan, US...)?
Once your contingency fund is completed, you can build an investment portfolio.
Don’t go all-in in stock. Don’t go all in a specific industry. Don’t go all-in with assets from the same country... Take into account your level of exposure to each of the key characteristics seen above.
Adapt your diversification strategy as your life changes
When you’re a young worker, you can take more risk than someone on the verge of retirement. When you’re single, you can take more risks than someone with kids 👶. Organize your portfolio according to your situation.
Here is my strategy:
- ~10% of my saving power goes towards high risk/high reward assets (crypto-currencies, high volatility penny stock...).
- ~50% of my saving power goes in real estate 🏡.
- ~30% of my saving power goes to the European stock market 🇪🇺.
- ~10% is invested in me 👨💼 (Tuition fees, Money for my personal projects...).
Keep a fun/experimentation fund
As mentioned above, investing is not always about tangible assets and returns. In the long haul, money dedicated to improving you as a person or as a professional is (almost) always fruitful.
If you can’t buy it twice, don’t buy it 🛑
Don’t use the fun/experimentation fund as an excuse to spend money willy-nilly. My rules to prevent binge-purchasing (especially in the sales period):
- When the price tag is superior to 150€ then I wait 3 months. If I still desperately want it, then I buy it.
- When the price tag is high (ex.: the latest MacBook Pro 👨💻), I make sure to be able to buy it twice to consider a purchase.
Beware of the market
The market can be erratic, and some stock can rise for no clear reason other than hype. Be comfortable with the idea to stay away from things you don’t understand. Don’t FOMO, don’t short. Stay away. The market can be wrong for longer than you can afford to lose money 📉.
Don’t trust the government too much
Take advantage of the tax niches offered by your government, but keep in mind that your government’s political decisions can drastically affect the performance of certain assets in your portfolio.
Don’t be blindly confident that it will systematically make the right economic choices and manage your exposure on the asset your government can reach.
Know your figures! (bis)
- Investing in stock, you can expect a ~7% annual return.
- Investing in real estate (France 🇫🇷), you can expect ~4% annual return.
- Investing in state-backed investment vehicles 🌐, you can expect up to a 2% annual return.
If someone promises you more for the same amount of risk, be suspicious, and conduct a thorough study before considering investing. High rewards always come with high risk, don’t get fooled.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.