It occurs to me that water may be the most commonly used metaphor in personal finance lingo. It permeates the subject’s jargon, doesn’t it? People can be underwater on a house. Their budgets spring leaks. They liquidate assets. Money flows in. And so on and so forth.
In fact, even people outside of personal finance use a lot of water-based analogies — including why they’re not involved in personal finance!
They worry that they’ll be in over their heads. That the depth and breadth of the subject is too much. That they’ll be bogged down with too much information and too many ideas. In short, that they won’t have a good jumping off point. So they begin to despair of ever navigating the waters of personal finance.
So when The Lady in Black suggested a “How do I get started in personal finance?” post, a swimming metaphor seemed like the perfect fit.
Here, then, is my aqua edition of the best way to get started in personal finance
There’s good reason for the stereotype of kids equipped in arm floaties: If you can’t swim, you need something that will let you bob along the surface.
The financial corollary is to simply have a look at your spending. This gets you in the waters of personal finance without danger. It lets you start to submerge yourself, without worrying about sinking into the confusing depths of personal finance information.
It’s vital that you never skip this first step — because it is the first step. Really, it boils down to the most basic personal finance tenet: You can’t properly manage your money until you know where it’s going.
So go online and pull up at least two months’ worth of bank/credit card statements and see how your spending shakes down. You’ll probably be surprised by how much you spend in at least one area: food, clothes, entertainment, etc.
Once you know what you want to fix it’s time for…
Financial swim lessons
Most swim lessons begin quite safely. I wasn’t even in the same room as a pool when I first learned swim movements. They had us practicing the breaststroke on the floor before we were allowed in the water. Even when we were in the pool practicing the harder moves,* we had grownups as spotters, buoying us up if we started to sink.
So in swimming you don’t go under because you start small and safe. And because there’s someone right there, focused entirely on you. In personal finance, you’re the one whose focus keeps you afloat, above the waters of information overload.
Obviously, there are a lot of aspects of personal finance (and myriad opinions about them). If you let all that in, it’ll weigh down your brain until it’s pulled under the surface of that information overload. You can’t let that happen, so you need to focus all of your attention on just one thing at a time. This will keep you above the waterline.
You have to tune out all the chatter and laser-focus on just one thing at a time. Consider it financial blinders. You have to put just one thing directly into your now-narrowed field of vision. I suggest the second-most basic tenet of PF: You need a budget.
Yes, your first tentative strokes in the PF waters should be a budget. A simple one. Keep it to just rent/mortgage, utilities, food and other recurring expenses like health or car insurance. You can get more specialized after a few months’ practice.
Those categories’ spending limits should take what you’ve learned about your spending and work toward your ideal numbers. Notice that I said “work toward” not “become.” First of all, drastic change tends to be untenable long-term. Second, you may never reach your ideal number. So step your budget’s figures down gradually — and be prepared to hit some walls.
The financial shallow end
Eventually, the swim lessons will be over. You can’t have a grownup spotting you forever. Similarly, you can’t keep your PF-blinders on indefinitely. Eventually, it’ll be time to expand your horizons, be that swimming on your own and, more pertinently, adding another personal finance subject to your repertoire.
Still, safety first: You stay in the shallow end. And in the realm of personal finance, that’s frugality — for two reasons.
First, the stakes in frugality are lower than those in most personal finance. If you make a mistake swimming in the shallow end of the pool, you can simply stand up to avoid going under. There’s no harm done.
Similarly, if you make a mistake in frugality, it rarely has any major consequences. Perhaps you don’t save as much as you had hoped. Perhaps you even spend a little more than you normally would have. But you can start fresh the following month. Or even the next week or next pay cycle, depending on how your budget is structured.
Second, frugality is also the shallow end of the information pool. That’s not to say that there’s a dearth of information. There’s certainly an intimidating glut of posts and books on the subject. Still, there are just three basic themes — do without it, find it cheaper or make it yourself — which makes the subject much easier to navigate.
In the beginning you’ll learn some basic things like how to coupon, how to track sales, how to stop using certain products (especially about how you should cut the cord and should find a cheaper cell carrier — cough cough Ting cough cough), how to batch cook and meal plan, etc.
Once you have those broad strokes (as it were) down, then you can graduate to the slightly deeper part of the shallow end: intermediate stuff like DIY repairs, making your own cleaning products and how to make the things you own last longer.
I’m not saying that frugality is simple. There’s still a very real danger of information overload. So it’s important to break the subjects down. Make small changes and only take on one or two at a time. Trying to learn too much too fast will, at best, lead to failure. At worst, you’ll end up drowning in too much information.
So be sure to make gradual changes, making sure you have each one down before moving on to the next challenge. That will let you successfully navigate the shallow end.
The financial deep end
Now that you’ve splashed around on the safe side, it’s time to brave the dangers of the deep end: investing. Here, the stakes are high. Not only are you actually putting your money at risk, you’re once again in danger of getting overwhelmed and drowning a sea (or, in this case, pool) of information.
Everyone has an opinion about how and where you should invest, when to cut your losses or cash out your wins, and how much you’ll need to comfortably retire. Alas, there is no right answer — otherwise there’d be a lot more billionaires in the world — so you’ll have to wade through a lot of posts and books.
Some of these will make sense, others will sound crazy. Some will be self-styled experts, some will be people with letters after their names. And only a small portion of each will will have advice that works for you.
Unfortunately, there’s no getting around the glut of material on investing. All the posts and books will put you squarely into the position of drowning in that sea of confusion (even in a metaphorical pool).
Once again critical thinking comes into play. You have to break things down into smaller components. It’s not just about which strategies you like. It’s about where you are in your life. If you’re older or just risk-averse, then you’ll need to play it a bit safer. This means you probably shouldn’t take advice from someone who is willing to choose high-risk stocks. Conversely, if you’re young and able to gamble more, you probably don’t want to heed the advice of people hedging their bets.
Just like swimming in the real deep end, investing requires constant movement. You need to keep an eye on trends, new strategies, how the stock market is faring and myriad other factors. At some point, you probably will become overwhelmed. Some people may do best relying on a financial advisor or investment fund rather than trading on their own.
Just as a lifeguard is trained to save drowning people, a financial advisor spends more time surrounded by and taking in investment information. They’re less easily overwhelmed — in fact, it’s their job not to be. So for people who can’t (or simply don’t want to) navigate the investing, there are advisors and/or professionally-run funds.
Of course, then there are subjects like FIRE, the tiny house movement, and… Well, a lot of other topics that I simply can’t cover without this being an entire book and/or greatly torturing the swim metaphor. So we’ll call those (especially FIRE) a back flip off the high board: something scary looking, takes a ton of practice and isn’t something just anyone can manage.
Did I forget any stages of swimming or personal finance? What’s your favorite PF metaphor?
*I could never quite mastered a proper front crawl since I hated putting my face in the water. I’m sure there’s a metaphor in there somewhere.