What does it mean to “get better”?
Getting better at personal finance would mean improving one’s ability to make informed decisions on how to pay for one’s needs and enjoyment. Making informed choices means knowing what the options are and having sufficient information to compare the options and decide which one makes the most sense at the time.
Hindsight has a role in reflecting on the situation, but reflection should not escalate into denigrating your past self. We should practice compassion for ourselves and remember that we’re making the best choices we can in the situation at hand. Counterfactual what-ifs do not change what you knew at the time a choice had to be made. The goal is to learn, not to self-flagellate.
Back to Getting Better
Sometimes, we don’t know what we don’t know. Being ignorant of our own ignorance is a difficult problem to solve. How do we even know what questions to ask? How do we recognize that there are blind spots? The best I can answer is be curious about the world around you.
- Ask yourself why you’ve made a choice you made.
- Ask yourself if you’d still make that choice if you had the knowledge you had now and articulate your reasoning.
- Consider if you learned something new that changes how you understand the options you had
That’s all easier said than done. It’s time-intensive, and I started this section as defining “get better at personal finance”; I should return to it.
To get better at personal finance, you have to get better at knowing why your assets increase (usually your money) and why they go out (usually to pay for expenses or pay down debt). Very rarely do we as individuals have cash go out because we’ve loaned it to someone with the expectation of actually being repaid. However, we regularly loan out other assets with expectations of the items eventually being returned. For example:
- a container of food you’re dropping off as a condolence to someone who’s grieving
- a book you think a friend might find interesting
- a pen or pencil because the classmate next to you forgot one
- a charging cord of some kind
- clothing
While one could say it is rather neurotic to keep an inventory of everything one owns, it’ll help when making claims with your insurer if something unfortunate were to happen to your belongs, such as a flood or fire damaging them all. However, that’s usually for more expensive items than a pencil.
To get better at making choices, you need to have better information. For personal finance, having better information means knowing:
- How does your money come in?
- How does your money go out?
- Who do you owe money to and what are the terms of these obligations?
The net (total saved money and value of belongings, minus total amounts owed to others) is the equity that you can use to self-finance any decisions you make. A common thing to self-finance would be the down payment for a house.
Once you have a better understanding of your financial position, you can answer questions like:
- Am I on track for how I envision my life in the future?
- Will I be able to retire?
- Can I cut any spending and not change how I enjoy my life?
- Are my investments aligned with my goals?
- Can I afford a car payment?
- If I accept this job offer and move, would I be improving my life or causing financial harm?