Updated on 08.17.09

The Personal Finance Toolbox

Trent Hamm

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.

The Tools
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.

Refrigerator Dies
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.

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  1. Emily says:

    Should “But what if you don’t have a refrigerator?” read “But what if you don’t have an emergency fund?”


  2. J.D. Roth says:

    Bah! Trent, you’ve done it again. You’ve reached into my brain and scooped out a post I’m working on. Only this time, you’ve done it in a big way. I’ll put my own “personal finance toolbox” article on the backburner now, I guess.

    (For those who don’t know, Trent and I seem to have some mysterious psychic connection which causes us to write about the same topics at the same time. It’s scary, actually.)

  3. AnKa says:

    The beauty of having many tools is also you don’t have to be good at every single one of them! There’s many ways to make a difference, and sometimes different people in the family can contribute with one tool each. My husband is brilliant at being ingenious about prolonging the life of the refrigerator. In the meantime I do a ton of research about the exact new fridge I want and can afford (and figure out how to pay for it).
    Together = awesome teamwork, happy family, and eventually a new fridge that is paid for and didn’t cause a fight. Because I got the one I love and the husband got the satisfaction of really really believing the old one had run its course.

  4. Sheila says:

    You’re just going to have to get up earlier, J.D.

  5. Bill says:

    Great tool:

    Don’t finance a car (especially a silly prius)

  6. Brittany says:

    I think if you don’t have a refrigerator, the set of tools you need might be different. =D

    Good post.

  7. katie says:

    If you don’t have a fridge, find a friendly neighbor?

  8. Along with “frugality” how about the proper mental mindset in general? When I was getting out of debt, I found that changing my behaviors and mindsets towards the money in my life in general went a lot further than simply trying to turn down the AC everyday.

    Revamp your personal perspective on money and most everything else will eventually fall into place.

  9. mellisa rock says:

    I really want to thank you for this post. My husband and I got a smack of reality about 18 months ago when we applied for a house loan and were turned down. We have been using some of these tools and I am happy to say that we have reapplied and while still waiting to hear, it’s a much better experience this time around. Steady behavior is what we struggle with most. At the end of the month we want to reward ourselves for doing all the good in the first of the month. Next month I am going to put the extra in my savings. Thanks so much.

  10. Julie says:

    Hi Trent,

    Here’s another one of those meals for under 10 bucks – http://www.time.com/time/specials/packages/article/0,28804,1819754_1819753_1819750,00.html

  11. craig says:

    I am curious to hear what people use their emergency funds for. To me, a broken refrigerator (or any appliance) is not an emergency, but something that should be planned for as a maintenance item (appliances get old, they stop working, you need new ones). I have a seperate savings account that is supposed to be used for these things.

    My emergency fund is only for real emergencies – loss of a job, serious medical issue, or ???.

    I guess it is all your money and all in savings, so it realy doesnt matter. Maybe it is just a psycholgical thing for me to keep them seperate…

  12. Wendybird74 says:

    Apparently Trent can read more than one mind!

    Just a few days ago I ran into a problem with my electric. Our rainy weather here in the northeast caused serious humidity problems in my basement where the panel is located and basically fried it! (Yes I have a dehumidifier…but it just can’t keep up with our weather.)

    Thanks to reading TSD, several months ago I set up an automatic deduction savings account (ING) as an emergency fund. Now, low and behold, I have an emergency!

    It is a reasuring feeling to have the ability to fix the problem without using the plastic and getting deeper in debt, but I’ve been worrying lately on how I will replenish it.

    Now I know….ramp up the frugality that I have been relaxing for the summer.

    Thanks again Trent!

  13. Chris says:

    The “Thirty Day Rule”

    I do this with almost everything, not just “major purchases.” When I see something I want, I take note. If I think of it again and it’s approximately a month later, then I buy it.

    Sometimes I use SavvyCircle.com to notify me if the item goes on sale. This has the dual benefit of giving me time to think about it and getting me a deal. Almost everything goes on sale eventually.

  14. Rachel says:

    Craig, our savings and emergency fund is in a lump sum. but we used to pull from it for travel and vacations. I started depositing into a seperate savings for that. I just couldn’t see a pleasure trip as an emergency. Of course when my fil passed away a few months ago, the travel expenses and the cost of the funeral (he had no insurance), came from the emergency fund. We are planning to save for future vehicle purchases, so I am thinking a seperate account for that is a good idea. But I would buy an appliance from the emergecncy fund.

  15. Andy says:

    Craig @#7 — I think of my fund as a reserve to use for large non-luxury goods and emergencies. So a fridge would count, but a new computer (or bike or grille) would not. I have used it to buy new cars before.

    Our emergency fund is in two layers — we have at least $1K in the bank, plus at least $30K in a money market.

  16. I know it’s not the point of the post, but I think a lot of people have crises and think to buy new rather than to look on Craigslist. For heaven’s sake, a fully functional name-brand non-clunker refrigerator on Craigslist can cost $100 (rather than $600-$2000)!

  17. Debbie M says:

    Craig – I’d say an emergency fund is for whatever counts as an emergency to you. Since you have a separate fund for maintenance, a broken refrigerator would not be an emergency for you.

    I don’t even have an emergency fund–I do have funds for a) home maintenance and repair, b) car maintenance and repair, c) my next car, d) vacations, computers, and other expensive fun stuff, e) retirement. I also have a (still smallish) fund for health emergencies. I have a pretty secure state job, so I don’t actually have a fund for unemployment, which is how a lot of people think of emergency funds. If some other sort of emergency came up, I would raid those other funds.

    More refrigerator death strategies:
    * buy used
    * hold out until your next paycheck to give you time to research a good deal by:
    – using a cooler
    – borrowing a friend or neighbor’s fridge (maybe you can cook enough for them a couple of times)
    – eating only non-refrigerated foods
    – storing things outside (if it’s winter)
    – renting

    Also, you can actually fit a baby into a pretty small place for a while–a lot of parents even sleep in the bed or room anyway.

  18. Nice analogies– problem is too many people refuse to open the toolbox until it’s too late and the proverbial basement is flooded.

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