This is the basis. Precautionary savings are easily accessible amounts of money that allow you to handle hard knocks or unexpected expenses. Concretely, we recommend investing an amount equivalent to 3 to 6 months of income in a sufficiently liquid investment (aka easily accessible) of the livret A style (or even life insurance in euro funds).
Realize that with this precautionary savings, you are actually building some peace of mind. Nothing is more annoying than having to tap into your investments or, worse yet, take out a loan to meet an unexpected expense. And for people with lower incomes, it is also this precautionary savings that will give you more peace of mind in the event of a dismissal, a change of job or any sick leave. Although there are various benefits (unemployment, etc.) the waiting time (between the payment of your benefits) can be cashed in by this precautionary savings.
No reason not to have precautionary savings. If you have ever consumed it, consider reconstituting it. This is probably one of the most important personal finance tips.
2 It’s not how much you earn that matters …
… that’s how much you have left at the end of the month. This is probably the most counterintuitive personal finance advice and yet … It’s easy to believe, especially when you have a small salary, that by earning more, life will be easier and you can get richer. While of course it helps, the most important thing is the money you will be able to set aside (and invest).
In other words, it is better to earn € 1,500 / month, ultimately to have few expenses (hosted with the family, low spend, etc.) and be able to set aside € 1,000 per month than to turn to 2500 € / month in Paris and to have expenses such that we can put aside at best € 200 / month. For this reason, income is actually much more relative to a given situation. And increasing income is not necessarily the solution. For example, having to move to a more expensive city for a higher salary is not necessarily in your best interest (more taxes, higher rent, etc).
Likewise, it is very tempting to increase your expenses in proportion to the increase in your income. We call it: “lifestyle inflation” or “lifestyle creep” in the language of Mr. Bean. And I know what I’m talking about because I’m the first to do this. The right strategy to overcome this problem is to allocate part of this increase to “pleasure” spending and the other part to investment. Obviously, don’t make me say what I didn’t say. Your best bet would be to have a big salary with proportionately low expenses because again the most important thing is the money you set aside, not the money you earn.
3: Analyze your expenses.
So I know this personal finance advice is going to be a bit divisive. I know budgeting is really boring. But, fortunately, applications exist such as the Bankin site which allows you to follow your expenses, income and investments very simply. You can find more information on this tool at the bottom of this article. Banks are also increasingly offering budgeting features. And finally, if you don’t have any of that you can also do it yourself with a pen and a sheet of paper or Excel. The idea isn’t to know exactly what you’re spending, but to have a rough idea of where your money is going.
You may see by this occasion that you are spending a little too much on an outing or restaurant (or something else). Again, the idea isn’t to say don’t go out or eat out, but rather to make sure you’re spending an amount you’re comfortable with. Hint, if you’re going to say “damn, I spent that much last month on * insert whatever you want *? “It is that you are probably not comfortable with the amount spent.
Making a budget also allows you to see the expenses that go a little unnoticed but which, when combined, begin to represent a tidy sum that we would have liked to spend elsewhere. Slightly too high box rates, insurance to renegotiate, bank charges that accumulate, etc. Personally, I take stock about 4 times a year on my situation and try to see what expenses I can improve.
4: have multiple sources of income
So, I agree, this personal finance advice might raise eyebrows. Either it’s obvious to you that we can have multiple sources of income, or (and I was), it’s something you’ve never dared to envy.
wise. For most people, the main source of income is wages. But, absolutely nothing prevents having multiple sources of income.
I’m not necessarily talking about having two jobs where you kill yourself, that just doesn’t make sense. What I mean is you have to create a strategy for yourself or you are going to have multiple sources of income, if possible, decorrelated from the time spent. A salary, of course, but why not rent from a rental, dividends from a financial investment, your objects (car, tools) that you could offer for rental between private individuals, copyright of a book that you will have written, your homemade products that you could sell as a micro-entrepreneur in the evenings and weekends, the interest that you could receive during loans between individuals with the Mintos platform, for example. Anyway, the list is long, but there are a ton of ways to generate multiple sources of income.
So be careful, I didn’t say it was easy. However, buying an apartment and collecting rent is easier than you think. And if you don’t have the budget for an apartment, there are boxes and parking spaces. But the takeaway from this personal finance advice is that the more you can build up different sources of income then not only will you automatically have more money but you will also have a more resilient situation. Indeed, if you lose your job you will always have other sources of income to rely on.
5: Invest regularly as soon as possible, even if it means stopping after.
There, I admit, that advice could have been in an article called “what I wish I had done sooner.” Indeed, I regret that I did not start investing sooner, even if only a little. I started investing in my late 20s and now I realize how much earlier I should have started. At the time, as a student, I did not have a round, but if I was really objective with myself there is always the possibility of setting up a small transfer of a small amount every month to start taking good habits.
In short, the bottom line is that thanks to the magic of compound interest, it’s important to invest as early as possible to start running the machine. Certainly, for the amounts to be significant, it is necessary, in all cases, to invest sufficiently large sums (and not only € 50 per month). On the other hand, what is certain is that the earlier the money is invested, the more it will pay off.
Suppose Mary invests $ 200 per month at age 20 and stops making payments at age 30. So, she will find herself with a capital which, placed at 8% and with the magic of compound interest, will bring her, at age 60, approximately € 362,500. So now David invests 200 € per month at 30 years old until he is 60 years old. He will end up with a capital of “only” € 281,000. I must have done the calculation several times because it seems so absurd to me. And yet it seems to be true. Better to invest in rates and not invest more than to invest later all the time. Even if the best would be to invest all the time and early.
And for those who think 8% is unlikely as a 30-year return. Who cares, that is not what is important in the point I am raising.
6: Understand the logic of inflation and interest.
“Almost 60% of respondents do not understand the effect of inflation on their purchasing power or the calculation of interest on an investment.” This is a fact that I relay very often in my articles, but it seems that in France (and not only) a lot of people do not understand the mechanism of inflation. And when I watch the news, I realize how true that seems.
Either way, you need to understand how inflation works and how to protect yourself from it. If not, it can only mean one thing, impoverishment. You will see your capital, regardless of the amount, melt like snow in the sun. So, in order not to waste the fruits of your labor, have some knowledge in order to place your pennies on a support that will pay more than inflation.
For example, nowadays, the livret A has a yield of 0.50% and inflation in France is roughly between 0 and 2% according to INSEE. Although there is a fair amount of reason to believe that inflation is actually higher because the INSEE calculation method is “questionable” but that is another debate. My point is that mechanically when inflation is higher than the interest rate on your investment, you automatically lose money.
7 Tell the difference between good debt and bad debt.
I know, to talk about it a lot around me, that a lot of people have observe the bank loan. And it’s true that it can be annoying to feel indebted to pay someone back every month or see the amount of monthly payments that never end. But you need to understand that not all debt is created equal.
If I had to sum it up succinctly I would say that going into debt to buy something that doesn’t pay off is bad debt that you should avoid like the plague. Paying for a wedding, a trip, or a new flatscreen with a bank loan, no matter how small, is probably a very bad habit to make that makes you pay for the property, much more than it actually costs.
On the other hand, buying a property that will give you a return that will earn you more than the loan rate is good debt. The perfect example is of course real estate. In addition to benefiting from leverage, you borrow at 1/2% and you can have a return of ~ 4% to 10 or 15% for the best. The choice is quickly made. Especially since in France we are lucky to have FIXED interest rates on mortgage loans. This is not the case in other countries.
In short, if you have an aversion to debt, this is your choice that must be respected, but try to separate things out. You obviously have the right not to follow these few personal finance tips.
Bonus # 8 Understand that money is time. And not the other way around.
After these seven personal finance tips, I wanted to add a little extra bonus. I like to think of money as a token that allows us to get out of the subway-work-sleep and get our time and peace of mind back. For example, if I need $ 1000 to live per month and I have $ 3000, then I have 3 months left. If I have 3 months left, I have 3 months to try and find a source of income (or wait for a source of income, like a loan repayment that ends) that would keep me going. Obviously what I’m saying is just theory, but to think of money as time allows you to have a whole different mindset and to see things differently. It is also a way to estimate the amount needed to start entrepreneurship by trying to estimate the amount needed to complete your projects.
You are certainly familiar with the old adage, “Time is money”. But, in my opinion, we should rather emphasize the fact that money is mostly time. Money can buy a lot of things, of course. But he can also buy the most precious asset that we have available, which is time.
Conclusion on personal finance advice
I hope you find these few personal finance tips helpful and that you have learned some lessons. Again this was in my opinion the essential point well summarized of what it is imperative to master if you simply want to take charge of your finances. If you want to deepen these concepts and learn others I can only invite you to subscribe to the blog and share it with your acquaintances who, too, would probably need it.