Life cycle of personal finance  

Throughout our lives we deal with money. We earn and spend it, we try to save and multiply it, we think about where to take it from and where to invest it. Not all of us think about investing, or rather, we don't use this term to describe our thoughts about our own money. But one thing is clear - everyone who has money regularly asks themselves questions that are very relevant to investing.

How to save money?
How long will it take to accumulate the required amount of money?
Where to invest money that we do not plan to spend quickly?

All of these questions are related to the investment process. If you answer them in the right order, we will get the right investment strategy for you.

For all the differences in career ambitions and individual professional characteristics, in at least one of its manifestations, each person's financial history is typical.

6 principles of personal finance and budgeting for 2021


At the beginning of his career he does not earn much - he gains knowledge and experience, develops professionalism and reputation. At the peak of the career, which is most often between the ages of 30 and 45, the regular cash flow in the form of salaries reaches its maximum value, which is individual for each person. And as you approach retirement age, the income stream begins to dry up.
In other words, if at the age of 30-40 we can regularly have an excess of money in comparison with expenses aimed at satisfaction of current needs, the retirement age, on the contrary, is characterized by a lack of cash flow.
There is a problem of timely accumulation and multiplication of excess cash flow in order to create a financial safety cushion for the future.

From consumption to investment

As we get used to spending, we forget that money is not only a means of payment, that is, a liability, but also an asset. Money should bring money, and the function of multiplication is one of the main, in addition to providing for our current needs.
It happens that our salary grows, money grows more, and at some point at the end of the month we find that we could not spend all that we earned. Something is left over. And the next month the story repeats itself, and even six months later. So, our needs don't keep up with the new level of income. And the freed-up surplus is an asset that can multiply itself.
But cash surpluses are very rare, so it is necessary to consciously build them up so that we don't end up in a vicious circle called "paycheck to paycheck".
How to do this?
There is a simple proven method, which the richest people in the world used at the beginning of their journey, and continue to use to this day.

The 10% Rule.

Set aside 10% of each of your income sources each month. It has been proven that a person can live just as well on 90% of their income (without worsening their quality of life) as they can on all 100% that comes to them.
This is very easy to test.
Try doing some home accounting. At least for a couple of months on a simplified form - an ordinary xls-file that displays all daily expenses by categories: groceries, car, clothes, pets - group as you like. The item of most interest to us that doesn't fit into any category is the "other" item. This includes various spontaneous purchases that were not necessary. Almost everyone who has tried to keep such records has observed a similar pattern - from 5 to 15% of expenses were always in the "other" category, that is, were spent on something spontaneous and completely unnecessary. So 10% of the budget in advance will not make the weather for you. And for those who do not have a spontaneous cash surplus, they can become a start-up investment fund.

The four envelope method

You can go a step further. There is a simple and effective way to plan your personal budget. It is called the "four envelope method" and requires you to take at most a few minutes a month to fully budget.
According to this method, you should do the following with each salary or other income you receive (for simplicity, assume that you receive a salary once a month):

Immediately withdraw 10% into an investment fund;
Allocate the amount remaining to each of the expense groups: food, entertainment, transportation and social expenses (gifts, medicine, etc.);
Divide the remaining amount into 4 parts, i.e. 4 weeks. This way you will strictly limit your weekly expenses to the size of one envelope.
Is there a surplus? Carry it over to the next week, and allow yourself the excess, but better - replenish the investment fund.
The benefits of this method are that you know exactly how much money you can afford to spend each week - and it's easier for you to plan your spending with the limits you originally set.

But saving is only the first step toward living well.
Money can't just lie around, you have to make it work. To make it more and more over time, not only by saving, but also by increasing the money we've already set aside.
You may ask, but why invest?

Even if we do not want to significantly increase our savings, we must at least protect them from inflation, that is, place them in an instrument that will provide an annual yield at the level of current inflation expectations.
Where can we place our savings in order to get a yield of at least 8% per annum and maintain their purchasing power at the end of the year at the level of the beginning of the year?
The most obvious answer is a bank deposit. But are there any other possibilities? And is a bank deposit appropriate for our goals?

Investment Targeting. Stage one is savings.

To answer these questions, you need to dig a little deeper. And ask yourself a few more questions. What am I saving my money for? For what purpose am I going to invest? What do I fear when dealing with money?
Successful investing begins with the answers to these questions, not by analyzing the returns of different instruments.
The first step is determining your savings goals. When you determine your goals, it will be easier for you to determine the investment strategy that suits you personally, as well as to choose the instruments and form an investment portfolio.

Life Stage Financial Planning


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