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Basics of Personal Finance
Personal finances are important for everyone but since this is mostly a skincare related blog, I want to address it from the beauty lover’s perspective: We have an expensive passion there, fellow makeup and skincare enthusiasts! Even if you don’t buy high-end and luxury items, chances are your affordable products add up to a significant sum. Have you ever calculated the total value of your collection? How many years of this spending habit until you spend the equal to a house downpayment?
I’m not judging anyone’s shopping habits, I just want to point it out, so you can evaluate your habits. From my own experience this awareness can help you resist unnecessary purchases and you can shop more consciously and truly enjoy your collection. All while striving for more financial independence! The point is not to shame anyone. The point is to get financially more educated. In the long run this will even help you to afford any beauty products you’ve been keeping on your wishlist. Sounds good? Ok, here we go!
DISCLAIMER: I’m not a financial advisor, I’m just sharing what I learned and read.
- Always stick to this rule: Pay yourself first.
- Know what you are saving for and how much you need,
- Invest in yourself and your financial freedom.
- Be aware of your monthly expenses and make sure you can cover them.
- Diversify! This goes for investments and for income.
- Allow yourself to fulfill your wants with your disposable income.
- Don’t get greedy or grumpy, be thankful for what you have and give charity to the needy.
Pay Yourself First
The first rule of financial freedom: Pay yourself first! I cannot stress this enough. By not taking responsibility and not holding yourself accountable on your financial situation, you steal from your own wealth. How many people just spend the majority of their disposable income? Well, if anything is left at the end of the month, I’ll save it – and then little to nothing is left. And little to nothing can be saved.
To gain full control of your finances, you need to follow this simple rule. Pay yourself first by saving and investing according to your financial plan -before you even consider buying non-essential things. Yes, I’m talking about excessive shopping for makeup and skincare. These things may feel essential, but they should not be your first priority. You can of course allocate a certain amount of your disposable income to spend it however you like – but first, please pay yourself.
Savings are also essential if you want to be financially stable. You need different types of savings.
The first type of savings is emergency savings. This is non-optional. You never know what happens, the current situation is the best example of that. Within weeks the public life can unexpectedly be brought to a standstill – people lose their job, suffer income cuts and face overall and financial uncertainty. What is happening right now, is of course very rare, but as we can see, it does happen. And it doesn’t always have to be this drastic, unemployment or other problems can occur at anytime. With the help of emergency savings, you can protect yourself at least to a certain extent and provide financial support for your family and yourself.
The other types of savings are not as crucial, but they show financial responsibility. When you develop your personal financial plan, you should not only calculate what you need to survive from one month to another. You should also plan for the mid- and longterm timespan. At least as best as you can. Are there any big events you need to pay for next year or within the next three years? Maybe within the next five years? Depending on your financial situation a big expense could be a car purchase, a wedding, a nice vacation or a downpayment for a house. Calculate how much you are going to need and how much you need to save monthly to have that budget. If you save for a specific goal you will be much more motivated and secure your budget for big purchases.
Saving for retirement
Depending on your country and personal financial situation this will vary a lot. So I’m saving this topic for a separate post. But please don’t forget your financial situation after retirement.
Pay off any debt
Before you can start your journey towards more financial freedom, you need to pay off any debts you have. This could be a student loan or any credit card debt you might have. If you bought any beauty products using the Klarna installments, I highly suggest to pay these off, too before you order anything new. I personally don’t take on any debt, for me it would be best to pay everything at once.
Of course with big ticket items like cars or housing very few are affluent enough to buy these things straight away. I do want to own a home within the next few years and I don’t think I’ll be able to do that without a loan. Some people use debt strategically to be able to afford things they usually couldn’t. It’s totally fine to handle this however you see fit.
When it comes to beauty purchases, I would recommend to better save the money upfront and just truly buy what you can pay all at once. Risks are high, that you’ll want to get the next release as well and the installments start piling up. Non-essential items should not put you into debt.
Next to saving, you should also be investing in your wealth. There are different ways of doing that, but in this post we will focus on investing money in stocks and bonds. I’ll also write a more detailed post about other types of investing soon.
Investing sounds scary? Risky? Yes, it does, but that’s only if you don’t look more into it. I always thought investing is for people with lots of money, that like to gamble and play around. Then I discovered books about financial freedom that taught me better. This is a complex topic and we will dive deeper in later posts.
The earlier you start with investing, the more impressive the outcome will be. You don’t need a lot of money to invest and you don’t need to study the stock market all day. There are rather safe ways to invest, if you invest consistently and with a long-term-strategy. With small amounts like 25€ per months you can already invest into well diversified ETFs! You don’t know what that is? Don’t worry, we will get there. Until then, just remember: Start early, start small but start, stay consistent and diversify!
Monthly income and expenses
To calculate your budgets and know how much you can save, invest and spend, you need to have an exact overview of you monthly and possibly yearly income and expenses.
Your income is whatever money you receive. This includes any pocket money, scholarships, your salary from your full time job, your side hustle, passive income, dividends from stocks or the like, royalties etc.
Like your investments it’s best to diversify your income and create multiple income streams in the long run. But don’t worry if you only have one income stream, you can always find ways to add other streams as well. Why would you need multiple income streams? If you have different sources to make your living, you don’t rely as much on a single income stream. It will be easier to handle if one stream gets cut.
You can further divide active and passive income streams. Active income is the type of income you have to actively work for. This is the most common income, you go to work, you get paid, you don’t work, you don’t get paid. Passive income is income, that you set up once and you keep getting paid, even if you don’t work for it the whole time – maintenance and checking etc. aside. For example: Dividends from stocks, rent from real estate etc. Creating passive income takes time, but it can be a valuable addition and grow to a significant source of income.
Your expenses are whatever you have to pay and account for. This is the outgoing money. Assuming that taxes are deducted automatically if you are employed, it includes your living expenses like rent, electricity etc. And regular monthly bills for internet, phone, insurance, gym membership etc. These costs typically stay the same or just change occasionally.
Then there are your monthly groceries. Write down how much you spend for a period of at least 3 months and calculate the average costs. Do the same with the money you spend on eating out, shopping and so on. Here you can also observe if you need to cut or limit any of those spending habits.
plan your finances
Of course your income should always exceed your expenses. If you spend more than you earn, you won’t be able to make it out of debt and become financially more independent. If your income is higher than your expenses, you can plan some more!
You have your fixed monthly expensed that you need to cover to keep your home and family running. How much percent of your income should go to these expenses? There are different percentages mentioned, depending on where you look for advice. These go from 20% or even less up to 50%, or if necessary higher. This will depend on your actual income and on your lifestyle. If you can make it with 30-40%, that’s awesome.
Then remember to pay yourself first! How much do you need to save for emergency savings and your other saving goals? If you don’t have a lot of money left and you can’t reduce your expenses further, at least try to save 10% of your income. If you don’t have enough money to save AND invest, I suggest you build up emergency savings first and take no risks. Aim to save and invest 30% of your income.
The amount of money you spend on your wants should make up the smallest portion of your expenses. But you should allow yourself to spend on non-essential items as well to stay motivated and not forget to enjoy life! When it comes to spending on your wants, just remember: You can have anything you want, just not everything. Meaning, you can buy that eyeshadow-palette, that toner, whatever it is – but you cannot buy everything at once you’re craving for.
Don’t get greedy: Give charity
Saving and investing money, seeing it grow can be very satisfying. It will motivate you to keep going. Make sure that you don’t get greedy or grumpy over money.
It’s important to pay your bills and nice to have, but it’s not everything. Stay grounded and remember to give to the financially less fortunate. Even if you don’t have much money to donate, a little can go a long way. You can also give your time and personal effort if you can’t afford to give money.
When you make financial progress you should use a little of it to support a cause you care about. Sharing will help someone in need. In return it will also help you to stay humble and grateful. Use what you have to bring some light into the world.
Taking care of your personal finances has many benefits. The topic might be intimidating and something you want to avoid. But once you face it, you’ll realize the potential. It can help create a better life for yourself, your family and through charity other people as well.
Do you want to continue the financial education journey? Read “How to Set Up Your Emergency Savings” here.
Do you want to read even more? I recommend this book (link is affiliated):