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5 Things You Should Know About Personal Finance

5 Things You Should Know About Personal Finance

    Money.  Oh money.  It makes the world go ’round.  It’s one of the biggest reasons for divorce.  It either frees us or enslaves us.  It is the commodity of all commodities.  And yet, as much as many of us make, most of us know so little about how it works.  I blame our parents.  They should have known.  They should have taught us.  Well, either way, I’m about to give you a quick crash course in cash money 101, and how personal finances should work.  Buckle up and enjoy the ride.  Hopefully you’ll be enlightened.

    1. How a credit card works

    Credit cards are an interesting commodity.  They can either work for you or against you, depending on how much you know about them and how smart you are with them.  The biggest problem with credit cards, though, is that we gain access to them before we know enough about them.  Your parents should have taught you how they work, but sadly, many adults don’t even know exactly how they work.  This article should help.  Read it.  Then read it again.

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    2. How to create a budget

    Budgeting is something that people either love or hate to do.  Personally I hate it.  But I keep a general budget because it’s important to know where my money is going.  A friend of mine knows where every dollar he spends goes.  I’d rather divide my money into 2 different accounts, business and pleasure.  I give myself an “allowance” to do whatever I want with monthly, and the rest stays in my “business” account for bills and other living expenses.  Need a crash course on building a budget?  Check this out.

    3. The time value of money

    The time value of money is a simple principal to understand:  basically it states that any amount of money is worth more today than the same amount of money in the future due to it’s earning potential.  This means that if you have $100 to invest today, it’s worth more than $100 a year from now, because it could be gaining value through investments for a year.  Let’s assume you average 9% on your investments… Your $100 today will be worth $109 in a year, whereas getting $100 a year from now is only worth about $91, due to the value of money lost in the year.

    This is very important when you consider the next point…

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    4. Start investing early

    Take a look at this chart.  Basically what it states is that when Saver B starts investing earlier on in life, the time value of his money allows for gaining potential so much greater that even though Saver A invested more than 4 times the amount of Saver B, Saver B has gained more than $400k more than Saver A by retirement.

    Moral of the story?  If you start investing now, you’ll have much more than if you wait till you make more money, even if you invested more in the years to come.

    5. Let your money work for you

    We were all taught that it is important to gain a good education and to learn valuable skills to enter the job force and start a good career.  But here’s what few of us have learned:  more important than having a good job is learning how to make your money work for you.  Consider this: if you can save $500k, and you average 10% on your investment portfolio, you will gain $50k annually without doing anything other than having the money.  $2 million will earn you $200k per year (earning 10%).  $10 million will earn $1 million per year.  The more you invest, the more you’ll make, without lifting a finger (well, other than managing your money, of course).

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    Sure it’s important to have a good job.  But it’s even more important to be investing your money, no matter how much you’re making.  If the goal is financial security and freedom, it doesn’t take rocket science; just a little discipline and sacrifice early on.  And what you’ll gain is so much more than what you could buy today.

    One last note:  $1 at age 18 can’t get you more than a coke, or maybe a dollar menu burger.  But $1 at age 18 is worth $54 at age 60 (assuming 10% again).  Keep that in mind the next time you stop at Starbucks.  Your cup of joe is actually taking more than $150 out of your retirement fund.

    Spend wisely.

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    Photo Credit: aresauburn

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    Ibrahim Husain

    Ibrahim is a management analyst who writes about communication tips on Lifehack.

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    Last Updated on July 8, 2020

    3 Techniques for Setting Priorities Effectively

    3 Techniques for Setting Priorities Effectively

    It is easy, in the onrush of life, to become a reactor – to respond to everything that comes up, the moment it comes up, and give it your undivided attention until the next thing comes up.

    This is, of course, a recipe for madness. The feeling of loss of control over what you do and when is enough to drive you over the edge, and if that doesn’t get you, the wreckage of unfinished projects you leave in your wake will surely catch up with you.

    Having an inbox and processing it in a systematic way can help you gain back some of that control. But once you’ve processed out your inbox and listed all the tasks you need to get cracking on, you still have to figure out what to do the very next instant. On which of those tasks will your time best be spent, and which ones can wait?

    When we don’t set priorities, we tend to follow the path of least resistance. (And following the path of least resistance, as the late, great Utah Phillips reminded us, is what makes the river crooked!) That is, we’ll pick and sort through the things we need to do and work on the easiest ones – leaving the more difficult and less fun tasks for a “later” that, in many cases, never comes – or, worse, comes just before the action needs to be finished, throwing us into a whirlwind of activity, stress, and regret.

    This is why setting priorities is so important.

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    3 Effective Approaches to Set Priorities

    There are three basic approaches to setting priorities, each of which probably suits different kinds of personalities. The first is for procrastinators, people who put off unpleasant tasks. The second is for people who thrive on accomplishment, who need a stream of small victories to get through the day. And the third is for the more analytic types, who need to know that they’re working on the objectively most important thing possible at this moment. In order, then, they are:

    1. Eat a Frog

    There’s an old saying to the effect that if you wake up in the morning and eat a live frog, you can go through the day knowing that the worst thing that can possibly happen to you that day has already passed. In other words, the day can only get better!

    Popularized in Brian Tracy’s book Eat That Frog!, the idea here is that you tackle the biggest, hardest, and least appealing task first thing every day, so you can move through the rest of the day knowing that the worst has already passed.

    When you’ve got a fat old frog on your plate, you’ve really got to knuckle down. Another old saying says that when you’ve got to eat a frog, don’t spend too much time looking at it! It pays to keep this in mind if you’re the kind of person that procrastinates by “planning your attack” and “psyching yourself up” for half the day. Just open wide and chomp that frog, buddy! Otherwise, you’ll almost surely talk yourself out of doing anything at all.

    2. Move Big Rocks

    Maybe you’re not a procrastinator so much as a fiddler, someone who fills her or his time fussing over little tasks. You’re busy busy busy all the time, but somehow, nothing important ever seems to get done.

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    You need the wisdom of the pickle jar. Take a pickle jar and fill it up with sand. Now try to put a handful of rocks in there. You can’t, right? There’s no room.

    If it’s important to put the rocks in the jar, you’ve got to put the rocks in first. Fill the jar with rocks, now try pouring in some pebbles. See how they roll in and fill up the available space? Now throw in a couple handfuls of gravel. Again, it slides right into the cracks. Finally, pour in some sand.

    For the metaphorically impaired, the pickle jar is all the time you have in a day. You can fill it up with meaningless little busy-work tasks, leaving no room for the big stuff, or you can do the big stuff first, then the smaller stuff, and finally fill in the spare moments with the useless stuff.

    To put it into practice, sit down tonight before you go to bed and write down the three most important tasks you have to get done tomorrow. Don’t try to fit everything you need, or think you need, to do, just the three most important ones.

    In the morning, take out your list and attack the first “Big Rock”. Work on it until it’s done or you can’t make any further progress. Then move on to the second, and then the third. Once you’ve finished them all, you can start in with the little stuff, knowing you’ve made good progress on all the big stuff. And if you don’t get to the little stuff? You’ll have the satisfaction of knowing that you accomplished three big things. At the end of the day, nobody’s ever wished they’d spent more time arranging their pencil drawer instead of writing their novel, or printing mailing labels instead of landing a big client.

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    3. Covey Quadrants

    If you just can’t relax unless you absolutely know you’re working on the most important thing you could be working on at every instant, Stephen Covey’s quadrant system as written in The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change might be for you.

    Covey suggests you divide a piece of paper into four sections, drawing a line across and a line from top to bottom. Into each of those quadrants, you put your tasks according to whether they are:

    1. Important and Urgent
    2. Important and Not Urgent
    3. Not Important but Urgent
    4. Not Important and Not Urgent

      The quadrant III and IV stuff is where we get bogged down in the trivial: phone calls, interruptions, meetings (QIII) and busy work, shooting the breeze, and other time wasters (QIV). Although some of this stuff might have some social value, if it interferes with your ability to do the things that are important to you, they need to go.

      Quadrant I and II are the tasks that are important to us. QI are crises, impending deadlines, and other work that needs to be done right now or terrible things will happen. If you’re really on top of your time management, you can minimize Q1 tasks, but you can never eliminate them – a car accident, someone getting ill, a natural disaster, these things all demand immediate action and are rarely planned for.

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      You’d like to spend as much time as possible in Quadrant II, plugging away at tasks that are important with plenty of time to really get into them and do the best possible job. This is the stuff that the QIII and QIV stuff takes time away from, so after you’ve plotted out your tasks on the Covey quadrant grid, according to your own sense of what’s important and what isn’t, work as much as possible on items in Quadrant II (and Quadrant I tasks when they arise).

      Getting to Know You

      Spend some time trying each of these approaches on for size. It’s hard to say what might work best for any given person – what fits one like a glove will be too binding and restrictive for another, and too loose and unstructured for a third. You’ll find you also need to spend some time figuring out what makes something important to you – what goals are your actions intended to move you towards.

      In the end, setting priorities is an exercise in self-knowledge. You need to know what tasks you’ll treat as a pleasure and which ones like torture, what tasks lead to your objectives and which ones lead you astray or, at best, have you spinning your wheels and going nowhere.

      These three are the best-known and most time-tested strategies out there, but maybe you’ve got a different idea you’d like to share? Tell us how you set your priorities in the comments.

      More Tips for Effective Prioritization

      Featured photo credit: Mille Sanders via unsplash.com

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