7 Personal finance wisdom from a 20-something

Ha! Bait title!

Here are some sound personal finance wisdom I’ve picked up along the way, in no particular order.

1) Don’t fly a ship you can’t afford to replace.
From Eve Online (aka Spreadsheets in space) and is probably the first thing older players will tell new players. Basically, if you can’t afford to buy two of the thing, don’t buy one in the first place. It’s a good rule to live by, which is precisely why it’s hard to live by.

2) An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket.
From Rich Dad, Poor Dad by Robert Kiyosaki. If there’s anything in the book you should take away, this is it. It is an oversimplification but it should be enough for quick assessments when you’re not sure if a thing is an asset or a liability. If an “investment” doesn’t pass this acid test, then it’s most likely a liability, no matter how persuasive the salesperson in front of you is.

3) Only budget money you currently have.
Rule number 1 of YNAB. (I’m currently on the free trial, hoping for a discount in the next 7 days.) You only get to spend money that you do have. No matter how it feels, credit card is not free money.

4) You can’t improve things you don’t keep track of.
Mostly related to weight loss and exercise, but totally applicable in personal finance. How can you budget properly if you don’t know where you’re spending your money?

5) Income – Savings = Expenses
As opposed to Income = Expenses + Savings. This highlights that you should set aside for savings first, before spending the rest of your money.

6) Cheap, Fast, Easy/Good: Pick 2.
This is true for software projects and this is true just about anywhere. Realize that people will be willing to pay if you can either save them time or save them effort.

7) Opportunity cost and sunk cost
I’ve written about opportunity cost. Sunk cost goes like this: I gave you Php 100 and you spent Php 20. Any future spending decision should be made as if I just gave you Php 80. The Php 20 you spent is now irrelevant. Sunk cost is interesting because keeping this concept in mind helps remove emotions from any financial decision.

These are principles I’ve put into place, mentally, such that when I have to make a financial decision, I only need to consult these principles and see if spending on something is compatible with my internal spending principles. There are loopholes in there if you look close enough, but for most of the time, these will suffice.

Up next, I’ll write about the tools that I use to keep track of my finances.