Editor’s note: This article was first published in August 2015, and describes Warren Buffett as 84 years old with $70 billion in the bank, which are 2015 figures; his fortune was in Berkshire Hathaway shares, not cash.
There are lots of blogs and websites about personal finance and financial education. Loads of them. I don’t know whether this one will be the biggest or the most widely read in this area, but when I started writing about it I had just one aim: to be the most practical and realistic.
That’s why, once we’ve laid out the concepts and lessons of financial education, we sometimes contradict those very points ourselves, because personally I like to look at everything from every possible angle and perspective.
See also: Financial education in 15 points that are easy to follow and understand
So what are the most important personal finance lessons?
I suppose most of us websites have repeated ad nauseam ideas like avoiding debt at a young age, spending less than you earn, saving, investing, building an emergency fund… and all these points really are important, especially for anyone just starting out. Until you know how to generate wealth and reach that longed-for financial freedom, the first lesson we need to learn is frugality.
But it’s true that being frugal, and giving up things we like just for the sake of saving, is what we call a defensive strategy (not very useful in the long run), because if you focus only on saving, you’ll find it harder to build wealth. Then again, boxers aren’t only taught to throw punches. They also have to be trained to take them and to learn to cover up. The attacking strategy in personal finance is, without a doubt, to look for alternative sources of income, or to create a full-blown income of your own.
See also: Why just saving won’t lead you to financial success
And of course, not everyone has the same idea of wealth or financial freedom. In the end, it all depends on your goal in life. But when it comes to financial goals, everyone who strives for financial freedom has a common purpose: satisfaction and security.
Satisfaction and security
See also: Avoid these psychological mistakes with your money to improve your personal finances
These are probably the most common financial goals: the satisfaction of having enough money to keep all your most important needs covered, and security, which is the guarantee that those needs will always be covered. We all want this, even the people who say money isn’t important.
But… what do we need to achieve satisfaction and security?
You can feel satisfied today and have all your needs covered. You may even have a sense of security. But in many cases it’s only a false sense of financial security if you lack a specific plan or goal.
For that feeling of satisfaction and security not to fade over time, you need enough money or enough assets to fund your lifestyle in case you couldn’t work tomorrow.
See also: This is the question that best measures the health of your personal finances
And when it comes to long-term financial security, there’s no exception to this rule. By assets we mean both those that generate a steady income (rental properties, shares…) and even your own business, provided it could keep running even if you weren’t able to lead the company yourself.
Two kinds of financial plan
1. The long-term plan
A long-term plan is made with retirement in mind. Some people will retire at 65, and others will run their own numbers so they can retire rich at 45. In this case, it’s a matter of working out how much money we need to save each month, the return we need to get on our investments, and even working very hard to earn as much money as possible in that period.
These people have a specific goal and a defined plan, and so they can reach that goal easily. In fact, it’s not at all difficult to reach retirement with 1 million euros if you start with this strategy at 20 to 25.
- This is how much money you need to save each month to retire rich
- The difference between starting to save at 25 and at 35
2. Being happy and free from today
Personally, I prefer this plan. Many people probably spend their whole lives working at something they don’t like, but every month they set aside some of that money for saving and investing, with a clear goal at a specific age.
Of course, these people don’t usually realise that depending on a single source of income is far too risky a strategy, because you have it today, but tomorrow… who knows.
What’s more, that approach can turn you into a miserable wretch who won’t be happy until retirement, and then probably won’t be happy after retiring rich either. You might even get bored. I’ll go further: you might die before then and never get to enjoy the money you saved your whole life.
But you shouldn’t make the mistake of skipping long-term plans in case you die, either, because it may well turn out that you don’t die after all, and you end up in such a dire situation that you wish you had.
Finally, there’s the idea of earning more money while enjoying the way we earn it. When you achieve that, nobody wants to retire. Why does an 84-year-old with 70 billion dollars in the bank go to work every day? Some will say it’s ambition, but the truth is it’s passion for what he does. We’re talking about Warren Buffett, who has no intention of retiring while his health allows it. And he’s not an isolated case; it’s the general rule among practically all the billionaires around today.
It wasn’t their eagerness to draw up a plan to retire early that made them billionaires. Quite the opposite. As the saying goes: “Do what you love and you’ll never work a day in your life.”
See also: Why don’t the rich want to retire?
And ultimately, that’s true financial freedom. Financial freedom shouldn’t be treated as a way of betting our happiness on one specific goal. It’s about enjoying and feeling passion all along the way, doing what we really love to do, and doing it well.
That way, you probably won’t need to focus so much on saving, and you may reach financial freedom at 35, 40 or 70, but you’ll certainly be free from the moment you decide to set out on that path.
But don’t twist this message
Starting your own freedom is one thing; not planning is another. Having a short-term plan shouldn’t cancel out a long-term one. Let me explain.
To know you’re on the right track, you should save at least 30% of your income every month. If you can’t save anything after covering your expenses, you’re not on the right track.
This is where we should follow Tony Robbins’s simple advice: your aim is to save more money, earn more money and get a better return on your money. Try to find a way to do it. Then you’ll be free today, and you’ll have financial freedom tomorrow.
Finally, we must always be very clear that the outcome of our finances, like everything in life, depends solely and exclusively on us and on the decisions we make, because we’re the ones with the power to take control of our lives, and therefore control of our finances.
Further reading
- 34 money lessons young people and adults should learn
- The worst money mistakes people make in every decade of their lives
- The 4 most striking differences between how the rich and everyone else think
- The best books on financial education and personal finance
Featured image: David Barrie, CC BY 2.0, via Flickr.
