There are so many good books and advice out there on how to get started on the path to financial independence. I recently read and would recommend these two books: Algebra of Wealth by Scott Galloway and The Psychology of Money by Morgan Housel. The challenge is that there is so much good advice in those books, it’s hard to know where to start.
My advice on where to start on the path to financial independence is having a good amount of emergency fund and sustaining that amount for more than 6 months. If you can do this one “simple” thing then you have achieved the first step.
All modern gas cars have a fuel gauge with the following properties: fuel level, low fuel indicator, and an empty indicator. Very importantly, there is an emergency reserve. Even when the tank shows empty there is just a bit of fuel left so you can get to the next gas station. The development of the gas gauge and fuel reserve is of course, no accident. It’s a combination of safety, psychology, and practicality that guided this design over many years of automotive usage.
By analogy, money is the fuel on the road of life. It doesn’t matter if you are a young successful highly paid wall street trader, a family person towing an RV full of kids, going fast and furious on the German autobahn, or nice and slow in the countryside enjoying the scenery. The only thing that really matters is the rate of gas being added vs the rate of gas being used. By the same token, it’s less important where you are in life, how much debt you have, or how much money you make or spend. In my opinion, the first thing to do on the path of financial independence is having a very basic fuel gauge, know when one is running on empty, and enough fuel to get to the next gas station.
In financial terms, a fuel gauge is the one primary spending account. All the bills should be paid from this account. There should only be just enough money for 1 month of expected spending. The paychecks and other income sources should go into a different account. There should be a biweekly or monthly exercise to estimate and transfer the necessary funds from income account to spending account. This separation helps one develop a rough estimation of the rate of earning vs spending. No detailed budget is necessary. The next most important account is the reserve account. When a spend account shortage occurs, one moves money from the reserve to the spending account.
The reason to manage money this way is to develop the intuition, sense of spending, and a feel for the rate of change between income vs expense. One would expect this equation of income and expense is constantly changing depending on one's particular situation. And it's all natural part of the difficult. Continuing on this journey will hone one's intuition, understanding, and discipline regarding finances. When you have that basic money sense and the good sense to keep the financial reserve tank full, then you are well on your way to financial independence.
What is your “fuel gauge” of money?
Ricky
No comments:
Post a Comment