5 Basic Rules for Financial Freedom

5 Basics for Financial Freedom

A Caveat:

    I am no financial expert; I do not have a degree in finance, nor do I have a CFA. For legal reasons everything mentioned down below is the ramblings of a guy with a modest investment portfolio, a small list of alternative investments and a modest Roth IRA. If you are in dire financial straits, seek professional help, don't listen to the ramblings of random men on the internet.

Money Made Simple

    Many real financial experts will tell you that simplicity is key when delving into personal finance. Everything you need to know about money, should be easily summed up onto a notecard. With that in mind, I thought it a prudent action to list out the simple things I have learned in my own journey through personal finance and explain the rationale behind it.

Rule One: The Budget is the Backbone of Personal Finance.

    Before stocks, bonds, ETFs, mutual funds, gold, silver, crypto, real estate, and all other traditional and nontraditional investments.... You need to learn to budget. If you spend above your means regularly and consistently, you will never have enough money. Most Americans do not have enough money to cover a thousand-dollar expense should an emergency arise, but they have the latest smartphone. Most Americans can't afford to miss a paycheck, but they'll finance a new car. It is ill advised for you to start dealing with market volatility and the inherent risk that comes with investing if forgoing a single paycheck would leave you hungry and homeless.

    For personal budgeting I use a variation of the 20/30/50 Rule. This budgeting rule basically states that for all of your take home pay, 50% should be spend on necessities like rent, car payments, groceries, and bills. 30% of your paycheck is discretionary spending and can be used for personal satisfaction and non-necessities like a night out, a stiff drink, etc. Lastly, 20% of your paycheck should be saved. This type of saving can go into a savings account, investment portfolio or other asset of your choice.

Rule Two: Find Your Financial Goal.

    Most young men new to the world of personal finance scramble to pour money into their investment portfolios while missing a core step to financial independence: having a goal in mind. Saving and investing is good, however, without an end goal to strive towards and keep oneself accountable, there is no objective metric to compare yourself against. If all you think is "I need to put away as much money as possible so that I can one day retire." that comes from a place of good intentions. But it is not the optimal path forward. It is better to calculate your end goal, (whether that is retirement, saving for a new car, renovating the house, etc.) and then plan and budget accordingly. That way, you can better hold yourself accountable paycheck to paycheck, and still know when and how to pay yourself for your hard work.

Rule Three: Returns aren't Everything.

    Growth is good don't get me wrong, but the core foundation of investing is sustainability. If you think you can invest your day-to-day salary and then become a billionaire and buy a mansion, I've got bad news for you. The point of investing is to sustain the quality of life you currently have, not to become massively wealthy through your investments. There is no point in having your stock pick shoot up 60% in one year, if that company fails in the decades to come and when you eventually need to cash out.     With that in mind, your money needs to have 2 properties: quantity and availability. You need to have a large asset base that can be readily spent should that need arise. That means that you need liquid cash. I usually strive to keep a couple weeks' worth of hard cash on hand, along with 1-2 months' worth of my budget in my checking account and 2-6 months' worth of my budget in my savings account. After that, I will continue to contribute to my savings account, but I will focus more of my efforts onto an investment portfolio of some kind.

Rule Four: Stock Talks are Sales Pitches

    Anyone telling you that X is the next hot stock, or Y is going to skyrocket in value, is someone to be avoided. I do not care what they look like, what they drive, or how loudly they yell into their phone camera. The Finance Bros and "Finfluencers" are snake oil salesman and bargain-bin CFAs. When it comes to general financial advice, you must guard yourself very well. Good financial advice that is general will never encompass stock picks because the amount of risk tolerance is different for everyone. There is a positive correlation between general financial advice that is too specific and the more sleezy a Finfluencer is. Ninety-nine times out of a hundred, anyone that is telling you to buy, sell, or call X or Y is trying to make themself rich by selling you a course of some kind. DO NOT FALL FOR IT.

Rule Five: Build a Base Before Buying Bogus

    Risk tolerance and risk management are the names of the game for every financial decision. On your financial journey you should become well educated on your personal risk tolerance. For the layman, risk tolerance is simply how much can you lose before you're screwed. Wealthy investors can be risky with their money because they have a lot to lose before they feel the pain. After all, what is a couple million in loses when you own billions. The average investor like you and I, however, do not possess millions sitting around to burn. We must be prudent, cautious, and capable. The less you own, the less you should be willing to lose in investments. That means that before you buy speculative nonproductive assets, you should have a solid foundation to rely upon in case that venture evaporates. Build a checking and savings account first, then diversify into the market. Once you have a phenomenal checking and savings account, and a well-diversified portfolio, only then can you venture into the strange world of alternative investments.