If you were asked to list the fundamentals of personal finance, you might include the following: live within your means, control debt, manage risks, and save for the future.
These are fairly universal actions; they apply to everyone’s personal finances. But execution of these basics can vary significantly – in priority, timing and proportion – depending on the source of your income, and your status as an employee or owner.
Whatever your financial condition, cash reserves are valuable; there is never a point where you can say you won’t need them. But while cash reserves are desirable and necessary, the safety and liquidity they require have opportunity costs; this cash could perhaps yield better returns if placed in other investments. The perceived impact of these opportunity costs is magnified by the current low-interest rate environment. When many safe, liquid financial instruments credit less than one percent interest, it’s hard to be excited about keeping money in them.
Money packs a tremendous physiological wallop. In general, the better our personal finances, the healthier we are, emotionally and physically. But when personal finances are out of balance, it can affect our productivity, relationships and personal well-being. And, right now a lot of American households – even those with high incomes – are out of balance. And stressed.
In September 1977, the hit TV show “Happy Days” started its fifth season. Since its debut, the situation comedy about 1950s-era high schoolers had seen a once-minor character, Arthur Fonzarelli – “the Fonz” – become a pop-culture icon for his leather jacket and cool demeanor. The season-opening episode began with the central characters visiting Los Angeles, where, in response to a dare, the Fonz was about to jump a shark – wearing water skis and his leather jacket.
As much as we might want to believe there is a magic formula for personal finance which simply requires plugging in the right numbers, success or failure has a lot more to do with our psychological makeup and personal habits than getting the numbers right. The math is the easy part; it’s the human element that gums things up.