I discuss the most basic of principles in personal finances here. That is knowing what you want, or goal setting. Once you know what it is you want, you need to start figuring out the rest.It all comes down to choice, and the the only way to really know what you want is by knowing the cost.
The reason I start here is because it often makes you re-assess the goal. I want to play a million dollar hand of blackjack, but I would equally enjoy owning a Harley. I could pick up a decent Harley for $40,000 that would easily suit my taste and needs, and I estimate it would cost $1,500 a year in maintenance & insurance. So quite obviously I will set a goal of owning a Harley before a playing a million dollar hand of blackjack.
So we have figured out the cost, $41,500 the first year and $1,500 each year after. I have started getting bonus income from work, and although it is not regular or guaranteed I think I will get about $100 a week extra on average.
$41,500 / $100 = 415 weeks, which is almost 8 years.
Ok, I can’t wait 8 years, but I really want a Harley. There are many choices, top three:
- Take out a loan
- Buy a cheaper bike
- Save more
I personally don’t like to take up debt to purchase things I want compared to things I need. I’ll go into this in another time. I am going to use a combination of 2) & 3).
Currently I spend $200/week on booze money, but I am happy to spend half that. I am also happy to buy a second hand bike in 2-3 years, that will be almost as good as a new bike today if it means I can get it earlier.
So now I’m looking at maybe $21,500 for a second hand Harley, and still roughly $1,500 a year cost. Given I’m now saving $200/week, and it costs half as much, I only have to wait 2 or so years, which is manageable.
This my friends is the fundamental part of any financial plan you will ever make. You have set a goal, you have assessed what it costs and what it will take to get there. Then you have re-assessed based on what the cost is. I was happy to lower my standards a little, and sacrifice something that doesn’t mean too much to me (drinking), in order to make my goal achievable.
I never want people to think I don’t think X Y or Z are not worthwhile and should be scrapped. You need to make your own assessment of what is worthwhile for you. There is no magical formula for this and there are a lot of free tools to help you that are a Google search away. It really all comes down to you knowing how much you spend, and where you spend it.
A good friend of mine finished high school, at the time I thought she was crazy because for a month she tracked every dollar she spent. $2 on a Mars bar, $20 on a cab, haircuts, food, you name it she tracked it. The beautiful thing was that she was shocked at the amount of money she spent on crap that she didn’t really want. She had no problem spending money on an expensive haircut or night out, or a present for a friend, but it was the amount of money spent on shit which she didn’t care about that made her change spending habits. She continues to travel the world on a modest salary.
So choice seems like a really basic thing you don’t need explained, but what you do need to know is how much you spend and on what, so that you can the decisions you want to make.