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Despite its significance, personal finance remains one of the most challenging aspects of our daily lives. Even with improved access to financial knowledge due to the development of technology, many people remain poorly informed about how best to deal with their finances. For those that seek to be on top of it, it can be quite daunting to make sense of the varying information on the internet leaving some poorly informed and/or misinformed.
But personal finance doesn’t have to be complicated and confusing to the average American says Curtis May, creator and owner of Practical Wealth Advisors.
In a recent interview on The Money Exchange podcast, he shares his ideas of five principles of personal finance which he has been teaching to his clients and anyone can apply irrespective of their current financial situation. With the proper application of these principles, we are confident that your personal finance will gradually improve. They are:
Your savings have to be safe, liquid, accessible and guaranteed. 401ks aren’t accessible till you’re 59.5 years of age so if the only savings you have are in your 401k, what do you think is going to happen once you find yourself in the middle of a financial crisis.
That’s why it’s important that you set up an emergency fund of at least 90 days of your income or worst case, your living expenses to get you going during the rainy days. It might seem like an inconvenience at first but you won’t regret it as it will save you from a lot of stress and anxiety when the inevitable crises of life come. Jump on this newsletter list to get tips sent directly to you.
2. MAXIMUM PROTECTION
This is just a fancy name for playing defense while you grow your income and build wealth and is the most neglected principle of personal finance because people often don’t want to consider the possibility of the worst-case scenario.
There are various factors that could derail you while you’re building your empire such as sickness, accidents, death among others. All this can happen to either you or your loved ones so the least you can do is to have insurance policies and a will in place so that no matter the tragedy, you and/or your family stand a better chance of making it through with as little financial stress as possible.
3. LEGACY OF WEALTH
This principle, to a certain extent, is inter-linked with the principle of maximum protection as it also covers the full transfer of assets at death. But it doesn’t only involve the transfer of financial wealth as money isn’t the only form of wealth.
It’s not enough to simply transfer your assets to your loved ones, you also ought to transfer financial knowledge to them to maximize the chances that they will increase generational wealth instead of losing it. This form of wealth is called intellectual wealth and the sooner you start transferring it to your loved ones, the better.
This principle is all about the available cash that you can have at hand to invest in potential income-generating opportunities. It is not to be confused with your emergency fund which is meant for crises. Ideally, your liquidity goal should be to accumulate at least 6 to 12 months of your income. This should be appropriate enough to take advantage of any great income-generating opportunities, especially during an economic downturn.
Last but not least, we have velocity which focuses on finding worthwhile investment opportunities that can not only increase your cash flow but also build long-term wealth. This principle is dependent on the liquidity principle as investing is heavily dependent on cash so without following the fourth principle, it’s almost impossible to reasonably implement this principle.
Ideally, you’ll need to diversify your investments across the four asset classes(business, real estate, paper assets and commodities) to reduce your risk so ensure that you do your due diligence before investing your hard-earned money into any of these assets classes otherwise, most of your efforts will be in vain.
As you might have noticed, all these principles are closely linked in one way or another so while you can’t start following all of them at once, it’s next to impossible to build and sustain wealth without eventually applying all of them in your personal finance. To get more information about these principles as well as other personal finance tips, check out episode 101 of The Money Exchange Podcast featuring Curtis May. Listen to the full episode now.
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