Personal Finance – not the most sexy thing to be contemplating during the current crisis. But is there a better time to improve your finance IQ? Absolutely not, the sooner you rip that plaster, the better the outcome, and now at least you have some time to scheme and plan for a healthier financial future.
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”
Albert Einstein
This blog aims to help you take back control of your finances. The cruel hard truth is, when you owe anyone money, be it the bank or your stingy mate Paul who keeps passively aggressively requesting that ten euro he gave you 8 months ago, they have control over you. There is nothing, not even a successful bottle flip, more satisfying than being debt free. And the big secret is, it’s simple, in fact it’s largely automated.
First things first, I AM NOT A FINANCIAL ADVISOR. I am an almost qualified Solicitor who unfortunately has extensive experience with debt. I got a bit obsessed with this topic a few years ago and was incredibly surprised at how easy it was to control your finances using some free personal finance tools. I am by no means wealthy, I am still on my journey to hopefully retiring to the Maldives when I’m 40. Secondly, I am not going to try to sell you anything, I am not going to ask you for any coinage of any sort, so tag along and see how easy this finance malarkey is.
What I propose (and I am open to any suggestions), is that I post one step each week. I will explain and outline exactly what you (the awesome reader) need to do to implement this tip and I will explain the reasoning behind it. This will be unbiased and simple personal finance advice that if you follow, will aid you to become debt free and start to build a nice little nest egg which you can rely on for years to come. All I ask is that you devote 30 mins per week to your personal finance, that’s all it takes and the sooner you start, the easier it will be (I took that from one of my mothers texts, thanks Mom).
“I don’t live to work, I work to live”
Amber from Love is Blind
Before we look at this week’s step, let’s look at how personal finance is easy peasy. You need to understand two concepts – the first is passive income.
This is clearly what Amber was talking about in Love is Blind when she proudly stated, “I don’t live to work, I work to live” – Amber had the right idea, kinda. Passive income is when your money works for you, when you’re sleeping, it’s labouring, it’s your diligent employee. Your money doesn’t get tired, it doesn’t take holidays, it works around the clock so that eventually you won’t have to.
The second concept is compound interest. Einstein once stated, “compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. A quick explainer: if you have €1000 earning interest (this is where you get money for having money) at 10% per year, after one year you will have €1100 without adding any extra money. But wait, if you leave this for another year, you are now earning 10% interest on €1100, so at the end of year two that €1000 will have become €1210. This cycle continues, the money keeps financially mating into the zillions if you leave it long enough. I know this might not seem like a lot of money but by putting in a consistent automatic process, this builds up a lot quicker than you might think. Just think about how quickly time passes, how recently does it seem like you were dancing to Uptown Funk in Coppers, which was released in 2014 people! 6 years ago…
Sorry about that, I was listening to Uptown Funk. Anyway I don’t want us to get bogged down in these concepts early on, we will address these in the coming weeks when the time is right. And if you don’t get them, don’t worry, you don’t actually need to understand them for them to work.
Step 1 – Take Stock
Now for this week’s easy peasy step – take stock. All I want you to do this week is take stock of your current financial situation. The key to this step is being brutally honest – leave your feelings at the door. This step is called eating your frog. It’s not glamorous, it can taste sour and be downright scary, but after eating your frog it all gets easier. You need to take into account every debt that you currently owe no matter how small. If you, like me, signed up for 41 different bank accounts in your first day of college (still have my free keep cup), you need to get access to every account you currently hold and see if you have an overdraft, or a pesky J1 loan, or hopefully, some money hiding out there.
Divide a page in two, put a plus on one side and a minus on the other. All your assets (the good stuff) go into the plus column. All your liabilities (the bad stuff) go in the minus column. Now tot these up and the difference is your net worth. By the way when I say assets, I don’t mean your iPhone or your car, I mean all your liquid assets that you currently have access to.
Don’t worry if you have a negative net worth (more on the minus side than the plus), that’s completely normal and that’s what I am here to help with! Basically, your net worth is a very clear and binary indicator of your current financial position. If it’s negative, we need to make it positive and if it’s positive, we need to work on accelerating its growth.
If you love lists like me, voila:
- Divide a page in two, put a plus on one side and a minus on the other.
- Write down all the debts you can remember in the minus column.
- Write down all the assets (usually just savings) you have in the plus column.
- Comb any bank accounts you think you might have and adjust both columns.
- Add up both columns.
- A higher negative column indicates a negative net worth.
- A higher positive column indicates a positive net worth.
- Subtract the two to determine just how negative or positive you currently are.
- Grab a cuppa tea, you’re done with week one! Great job.
That’s it for week one folks. If you enjoyed reading and want to sort out your personal finances once and for all, please subscribe!
Inside Out Finance 