Tuesday, January 20, 2009

Money! It's a Gas.

Someone recently pinged me on IM and asked about my savings and investment strategy. The next thing I knew, I had written them several pages' worth of dense, punctuation-free text. This isn't the first time I've talked about it, and it's a topic that I really enjoy, so I figured it would make sense to jot down some of my thoughts while they're fresh, and maybe will point people here in the future rather than subject them to an endless stream of "Oh, and also!" or "But don't forget!"

I'm envisioning this as a mini-series, but we'll see how that goes. Tentatively, I'd like to break it up as such.

0: First Principles. What are your goals?
1: Income. Big-picture planning, salaries, careers, and windfalls.
2: Expenses. Needs, wants, and budgeting.
3: Cash Flow. Moving money from A to B, while hopefully keeping some.
4: Priorities. Emergency fund, debt, savings, retirement.
5: Debt. Good kinds, bad kinds, and how to get rid of it.
6: Safe Investing. Short-term and safe options.
7: High Roller Investing. Long-term and lucrative options.

Then, if I still feel like writing more, maybe I'll hit some Chris King U topics:
8: Inflation. Why movie tickets are over $10.
9: Reflection. How to check up on yourself and make sure you're on track.
10: Credit Score. Why it matters and how to improve yours.

First of all, some up-front disclaimers:
I'll describe some things that have worked well for me, but that doesn't necessarily mean that they'll work well for you. When possible, I'll try to be explicit about my prejudices and circumstances, so you can best judge where I may be biased. As with any free money advice you get from anyone, take everything with a grain of salt. If you're thinking of making a big money decision, it might be a good idea to hire an expert like a certified financial planner or public accountant.

Now! On to goals.

I think the most important impact money has on us is psychological. We can become obsessed with making money, with spending it, with comparing our wealth to others'. This is true all along the income spectrum - no matter how much money someone has, they probably want more. A person who earns $1 million a year might be much more worried about their finances than someone who earns $20 thousand a year.

So, in my opinion, the most important thing you can do is to make sure that money is working for you, and that you're not working for Money. In other words, being in control of your financial situation means that you can have a powerful tool on your side to get things done. When you lose control of your financial situation, you start worrying about money and it becomes your master rather than your servant.

The first step in establishing your control over money is to define its role. What is that role? Well, that's the fun part - it will be different for every person: you get to choose! In fact, the first step - Step 0, as I'm calling it here - doesn't involve money at all. Instead, spend some time thinking about what you want out of life. What are your goals?

If that sounds really vague, here are a few hypothetical goals that some people might have:
"I want to become famous."
"I want to raise a family that will have a better life than I have."
"I want to meet as many fun people in this world as I can and keep relationships with them."
"I want to serve God and work to increase my faith."
"I want to help alleviate the pain and suffering in the world."
"I want to live a comfortable life."
"I want to live an exciting life."
"I want to work as little as possible."

All of those might sound good, but odds are one or two resonated more strongly with you. Think about what gives you the most satisfaction, what is most important.

When that's done, congratulations! You've taken a crucial step. Now, the abstract worries of "Do I have enough money?" that never go away can be replaced with a more concrete question: "Am I advancing towards my goal?" If the answer is "Yes", then you can sleep peacefully and contentedly at night.

Up next: Moving towards your goals by getting a job.

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