I like to think of one’s personal finance state as something like a toolbox. In order to accomplish a major task, one must use more than one tool from their toolbox to make it happen. Let me explain with a bit more detail.
There are many, many different personal finance tools in one’s toolbox. Here are a few examples that I find in my own toolbox.
Frugality If you look at a specific area of spending, how can you reduce it and still get a reasonable amount of personal value out of it? In areas you don’t value, cut that spending to the bone; if you do value it, find ways to get the best bang for the buck.
Increasing Income Work on your career. Get a second job. Start a side business. Whatever it takes to increase your cash flow.
Steady Behavior “Celebrating” by spending wads of cash can undo all of your good work in other areas. Being steady and consistent in your behavior reaps big rewards.
The “Ten Second Rule” If you’re about to buy something, pause and ask yourself if you really need it. If you can’t think of a really compelling reason, put it back.
An Emergency Fund If something goes wrong, an emergency fund is the perfect tool to pull out and fix the problem.
Targeted Savings If you’re tackling a big goal, some size of targeted savings is what you want to utilize.
Investment Accounts Investing introduces some risk into the equation, but can help you finish things more quickly. It’s something like using a power tool – potentially quite dangerous, but also potentially able to help you get the job done quite fast.
Success Measurers It’s like a tape measure, one you use to measure the growth of your pumpkin for the fair. In this case, though, it’s simply all about measuring your financial success and growth: tracking your net worth, for example.
The “Thirty Day Rule” If you’re considering a major purchase, put it aside for thirty days and let it breathe. After thirty days, if it’s still on your mind, it’s probably a good sign that you should pull the trigger.
Obviously, there are many, many more financial tools that people have in their toolboxes. What tools do you have in yours? Which are your most well-worn tools?
Examples of the Toolbox at Work
Obviously, forward progress in financial matters is usually a matter of using multiple tools. Here are a couple examples.
Your refrigerator suddenly dies. So, you tap into your emergency fund and buy a replacement and then you perhaps use a bit of frugality and automatic savings to replenish that emergency fund.
But what if you don’t have a refrigerator? You might find yourself forced into using credit – and then perhaps having to find a new source of income to pay off that credit. Again, you’re using multiple tools.
A New Home
You’re newly married and are thinking about having children in the future, but you know your apartment is too small for another child. You’ll have to move at some point in the future.
You might want to get a second job to increase your income, but that extra income goes to waste if you don’t also set up a savings plan for that money. You might also want to start rocking that frugality horse a bit harder than before, looking through your life to areas unimportant to you to cut spending.
The Big Key
What’s the big key here? Very rarely is one tool enough to do anything of significance. Frugality alone isn’t enough if you’re not saving the money. The thirty day rule isn’t enough if you don’t do a bit of research during that thirty days to find the best value for your purchase. An emergency fund isn’t enough if you don’t replenish it with a savings plan after you use it.
Mastering frugality alone isn’t enough. Nor is simply setting up automated savings, or focusing solely on your career. Financial success comes from learning how to use a wide variety of tools until they’re so comfortable in your hand that you almost forget they’re there – they become a part of you.