We cannot overemphasize the importance of paying attention to your finances. Personal finance is an essential part of self-actualization. To go from where you are to where you want to be requires more than attitudinal and personality changes. There must also be changes (negative and positive) in how you handle your finances. Finance is one of the essential resources that are integral to the achievement of our ultimate goals.Finance is one of the essential resources that are integral to the achievement of our ultimate goals. Click To Tweet
Countless resources will educate you on some critical issues when it comes to personal finances. There are time-tested truths that you must adhere to if you will make significant progress leading to ultimate fulfillment. Some personal finance wisdom are non-negotiable no matter who you are and what your circumstances are.
Finance is one of the essential resources that are integral to the achievement of our ultimate goals. . Changes in conditions may necessitate changes in the application of some personal finance wisdom. Recognition of this will ensure that we don’t apply personal finance wisdom in a wooden manner that will lead to more hurt than healing.Finance is one of the essential resources that are integral to the achievement of our ultimate goals. Click To Tweet
The road from general wisdom to personalized wisdom is an important one that we must be willing to tread.The road from general wisdom to personalized wisdom is an important one that we must be willing to tread. Click To Tweet
It is essential to think through some examples of how the “personal” in personal finance can have a significant impact on how we interpret or apply some general wisdom.
Differences in Goals
A difference in individual goals is a basic one. If our goals are different, then there will be some marked differences in our approach to personal finance. For example, consider the question of buying or renting a house. Someone whose end goal is to establish a business and has only come to a city to work for a few years to raise capital for his company will answer that question in one way. On the other hand, someone who is building a career and has his eyes on the top of the corporate ladder will answer the question in another way. Renting a house will be a better decision for the former.
Differences in risk appetite
Differences in risk appetite come to play, especially in investment decisions. How should you diversify your portfolio? What should be present? What should be absent? What should be the stocks to bonds ratio? Should you buy mutual funds instead? What type of shares should you buy?
Every individual has a different risk appetite. Some are risk-averse and don’t like taking risks. There are the risks seeking individuals who believe the higher the risk, the higher the return. Also, some risk-neutral individuals like to play in between and analyze risk-reward dynamics more critically. There are also more nuanced options apart from these three.
So when it comes to investment decisions and portfolio diversification, you have to understand your risk appetite and apply general wisdom in a way that aligns with your appetite.
This does not mean that people do not change across the spectrum based on the pursuit of their goals. But such fundamental changes don’t come quickly, and it is better to avoid the emotional problems that may arise from pursuing a path that is significantly contrary to your risk appetite.
In the scenario above, the risk-seeking person may have more stocks, the risk-neutral person may embrace more of mutual funds, and the risk-averse person may seek bonds and treasury bills.
Differences in locations
Where people live will also have some significant effects on how they personalize personal finance wisdom.
For example, one of the factors to consider when it comes to the “owning or renting” question is property taxes. In some local governments or county, the property tax may be much higher than in some other locations. This difference may be significant enough to affect your decision to own or rent. However, for another person in another area, the property tax rate may not be substantial enough to influence the decision to own or rent.
Should you buy a car? Your location is also one of the critical decision criteria. How close are your workplace and the grocery store to your home? How organized is the public transportation system? These are among some of the location-based questions that will help in deciding between buying a car and using the public transport system.
Differences in situations
One way to see this is the difference between term life insurance and cash value insurance. Should you ever buy cash value insurance? Term life insurance may generally be better than cash value insurance, but when you are in certain situations, it may make sense to consider the latter. This is true when you are in circumstances where you expect to have some estate tax problems. People with very high net worth can purchase cash value insurance to enjoy some estate tax benefits.
Differences in personality
Should you pick your shares or purchase mutual funds? This is one of the decisions where your personality comes to play. If you are not the person who likes working with numbers, reading charts, or perusing financial statements, the latter option may be a better option. The number cruncher who is very good with financial statements may want to set a percentage of his investments picking his stocks.
If you are a very creative person who likes starting things out and organizing people and resources, you might be better served to start your own business (if you have the passion). But if you are more of the analytical mind, who can evaluate and make the right decisions, you may be better served to buy other businesses and allow others to run it. You might also be better served to buy real estates.
These are just some few examples of how important the “personal” in personal finance is. There will be many times where you will have to make some decisions regarding personal finance, where there is no right and wrong decision. But understanding these individual factors will help to shape your mind on how to make the right choices in your circumstances. Grasping this can be the difference between poor decisions and wise decisions.