Intro - Money 101
Personal finance is a hard subject to understand. Crunching numbers, like investment returns, can be easy. After all, math never changes and 2 + 2 will always equal 4. The problem is that when there are literally thousands of options it is impossible to have a good understanding of all of them. That leaves you vulnerable to bad choices or more likely, open to manipulation by selfish individuals who fill their wallets by emptying yours.
The goal of this blog series is to walk you through financial management from A to Z, starting by (1) identifying your goals, (2) evaluating all the ways they might be achieved, (3) followed by the pros and cons of each approach, and (4) looking at which approach suits your goals best. Our aim is to provide you a framework that empowers you to make the best choices for yourself.
What are Your Motivations?
Money is a means to an end, and each of us has a different motivation for obtaining it. People have very different ideas for how much money they want, based on their personal motivations. If you're reading that and thinking “that’s bullsh*t, no one turns down money”, here is what we mean:
Imagine an experienced professional who’s taken a day off to celebrate her daughter’s birthday; is she going to get up and leave if her boss offers overtime pay to come into the office? Unlikely. Make the same offer to a young single college graduate who is saving up for a trip to Amsterdam and he would probably say yes.
Of course, there are people who pursue money merely for the sake of “being loaded”, but most of us live more interesting lives. We want to manage our finances well so it can enable us to pursue the things we want in life, like exploring new countries, spending time with our loved ones, challenging ourselves by launching a new venture, etc.
Your motivations determine how much money you need, which in turn dictates how to best manage your finances. So make sure you know what drives you and motivates you before you go further in your financial journey, otherwise, you might find yourself constantly changing priorities and making very little progress.
Understanding Your Goals
Once you understand what motivates you, we can start looking at what goals you must reach so you can live your best life. Here are really only two factors that go into your financial goal-setting:
How much money will you risk for more money?
How much risk will you accept?
The reason we say your motivations in life determines your financial planning goals is because the rate at which your wealth grows is entirely a function of these two items: how much money to invest, and how much risk to accept. Someone trying to afford a penthouse in downtown LA will need his or her wealth to grow a lot faster than someone simply saving up for a comfortable retirement in Bozeman, Montana.
We know this might seem overly simplistic and not very helpful at all, but it is a perfect summary of how money works. You must take risks to make money, and the more money you stand to gain, the higher the risk that you might lose your money. It might sound like a terrible deal, but the risk and reward trade-off is a fundamental concept in finance. Throwing all your money into a risky startup gives you the chance to strike gold if that startup becomes the next Apple or Tesla, but 90% of all startups fail and you might very likely lose everything you invested. Finance = managing the risk and reward trade-off.
Usually, "aggressive" strategies are for people who are okay with a high-risk high reward situation, and "conservative" strategies are for someone who can not tolerate risk or can not afford a lot of risks. Depending on what you want to achieve in life and your current situations, the best option for you will fall somewhere along this spectrum. For example, imagine two young college graduate both with $65,000 in starting salary:
Graduate A has no student loans (thanks mom and dad), and has no major life changes planned for the foreseeable future
Graduate B has $100,000 in student loans and is planning to purchase his first house after 4 - 5 years
It would not be a problem for graduate A to adopt a more aggressive approach since he has very few financial obligations, even if the stock market suddenly dropped 30%, he can simply wait for the recovery, he’s not in a rush.
Graduate B would be best served with a more conservative approach since he has much more financial responsibilities. If his investment portfolio dropped 30% right as he’s ready to buy his first home, it could very well mean he can no longer afford the purchase after years of diligent saving.
No One Size Fit All
Hopefully, we have demonstrated to you that when it comes to managing your money, there is no one golden approach that can be uniformly prescribed to everyone. How aggressive you should be with your money depends on what kind of goals you want to meet, which in turn are based on what motivations are behind your need for money to start with.
On one hand, finance is a very abstract, conceptual sort of thing where the laws of mathematics and economics rule sovereign. However, we will argue it is also one of the most personal subjects since it ultimately traces to what we want to achieve in life and how we can get there.
Just like how a good doctor takes the time to get to know her patients beyond the surface symptoms to really understand what is best for them, good financial planning should never be divorced from the people behind the numbers, which is why we dedicated the entire introductory post to connect financial decisions and how they relate to you.
Up Next…
Next up, we will be diving into the more theoretical realm of money management. Understanding the way wealth is created or destroyed is fundamental, and we will be going over the core components of that process. As long as you can do middle school arithmetic, the math shouldn’t trip you up. So follow us as we explore the mechanisms behind how fortunes are made and lost…
