Personal finance for the modern professional
The concept of money is amazingly easy to understand: if you have some, you can spend some, if you do not, you can go out and earn some. Simple enough.
But when you add in credit cards, debt, savings, stocks, and investments, suddenly the inherently simple concept of money becomes convoluted and, at times, downright terrifying! Then you add in the changing financial landscape in today’s digital age and the whole thing becomes even more confusing and overwhelming. Money might be easy, but managing it is something else entirely.
That is why we put together this article to take a fresh look at personal financial management and provide today’s modern professional a guide to effectively managing one’s personal finances.
Today’s current view of personal financial management:
Even though money is an easy concept to understand, it is also a very awkward one to talk about. It is very personal and uncomfortable to discuss even with the most trusted family, friends, and financial professionals that we know. So, we are forced to undertake financial education on our own and inevitably hear financial platitudes like “credit cards are evil” and “you should never go into debt.”
Though catchy, these sayings are incomplete, just like the Four-Pillar framework we have come to know when it comes to personal financial management which is: Earn, Spend, Save/Invest, and Borrow. However, there is a fifth element, crucial in today’s digital age yet often forgotten, is Protect.
We will go through the refreshed Five-Pillar personal financial management framework in this article.
This Pillar is straightforward: find a way to generate income to have something to manage in the first place. Most people obtain some form of a job, whether full-time, part-time, or freelancing, to actively earn money.
And in today’s digital economy, there are countless new ways to earn extra cash. With a smartphone and an internet connection you can sell your locally made crafts (Etsy), drive others from A to B (Uber and Lyft), rent out your car (Getaround), your home (Airbnb), and even your pool (Swimply).
Once you earn some money, this gives you the opportunity to spend it. The trick with this Pillar is to avoid overspending. Practicing restraint on consumption is key in establishing a stable foundation for financial security.
With today’s Fintech startups and credit card companies providing us more access to credit and incentivizing more spending (like Chime, Tomo, Plastiq, and Affirm), the Spend Pillar can become a slippery slope to overspending.
A basic rule to follow to practice wise spending is using the 50/30/20 budget. This involves using 50% of your after-tax income for essentials like rent/mortgage and food; 30% for non-essentials like going out to eat, shopping, etc.; and 20% to pay yourself (i.e., Savings Pillar).
This Pillar focuses on the 20% you paid to yourself, or your savings, mentioned above. As you practice good spending and build upon those savings, the Save/Invest Pillar focuses on generating passive income. This can be as simple as putting your savings in a high-yield investment account (i.e., a savings account, certificate of deposit, etc.), investing in the stock market, and/or investing in real estate.
Major banks like Chase, Wells Fargo, Charles Schwab have launched mobile apps to assist their customers with managing their checking/savings accounts to respond to the evolving habits towards mobile banking. These platforms offer easy-to-enroll high-yield savings and retirement accounts (e.g., IRA, Roth IRA) to promote healthy, long-term financial planning.
Fintech platforms like Acorns helps with sustainable savings practices; robo-advisors like Wealthfront and Betterment provide low-cost, low-risk investment funds that can provide higher returns than traditional savings accounts. And Robinhood, which offers free stock trading for its users to democratize the financial markets and allow retail investors to access the stock markets.
The financial landscape, more importantly access to markets, has never been easier and creating enough savings and wealth to make your money work as hard as you do is an essential part of your personal financial management.
Now we get to the Borrow Pillar. This one is perhaps the most misunderstood.
Borrowing begets debt and most of us are deathly afraid of incurring debt. Debt negatively impacts our credit scores, which can restrict our financial opportunities, and too much of it can ultimately lead to financial ruin that can hinder how we live our lives. It can be a serious disaster!
But debt is not inherently bad. Because money is such a sensitive topic and we are scared into never going into debt (even though we inevitably do), we do not learn how to deal with debt properly. And if we are not informed, this can lead to the financial catastrophe mentioned above.
Here is a positive (perhaps surprising) statistic: Most Americans have debt and 68% say that debt has led to more opportunities and a higher standard of living. For most of us, borrowing money is necessary. We need it to buy a house, buy a car, start a business, go to school, and improve our kitchens. And every time we swipe our credit card, that is an example of revolving debt. So, it really is not that surprising that debt can lead to good outcomes and improve our lives!
Access to money and credit is much easier today than it has ever been namely because of the online lenders that have popped up in the last decade that has made the lending process much more streamlined. Sofi can give you a $40,000 loan within 24 hours! Then, peer-to-peer loans sprung up as an alternative to having to deal with the banks, led by companies like Lending Club and Prosper. And most recently, the idea of point-of-sale (POS) or Buy Now, Pay Later (BNPL) loans for moderately priced items, like shoes and mattresses, that offer payment plan options at an online checkout have gained traction with companies like Affirm and Afterpay.
Other Fintech companies like Tally, are assisting customers with forming good habits to ensure on-time payments to manage credit card debt.
The key to the Borrow Pillar is not to be afraid of debt, but to be well-informed and practice good personal financial stewardship. This can be as simple as monitoring your credit cards, minimizing outstanding balances and paying off your loans on time!
The final pillar that completes the Framework is Protect. The Protect Pillar is making sure you are protected from unexpected life events, which usually comes in the form of insurance.
Money can be fickle, and disaster can strike at any moment. This uncertainty can be crippling, and though we can try to mitigate it by Earning more, Spending less, Saving more and Investing and Borrowing responsibly, these strategies are no match for the unknown that can throw a wrench in any well-crafted personal financial plan if the Protect Pillar is ignored.
Think about some of your biggest financial decisions you have/want to make (e.g., buying a house, a car, starting a business, etc.). The one thing you get with each of these is an insurance policy. Insurance has a bad reputation for being confusing, unnecessary, and even seen as a fraud. Insurance is something you want to have but never want to use. It is like you want to make sure you have auto insurance, but do not ever wish to be in a car accident. And so having insurance is critical in minimizing any vulnerabilities you may have in your personal financial management plan.
The image of insurance has improved with the advent of recent Insurtech startups. Companies like Root (auto), Lemonade (renters), Hippo (homeowners), and Clover (health) have proven to be successful in giving customers confidence and security that reflects today’s digital way of doing things.
Aside from the standard insurance products that most people have – homeowner’s/renter’s, auto, and life – there is great diversity in insurance products. One that is worth considering in the context of personal financial management is credit insurance. Credit insurance protects your loans and your credit score, by paying off your debt via monthly payments in the event of a disability, involuntary unemployment and even death.
Our financial world is uncertain. In just the last 20 years, we have seen once-in-a-lifetime financial disasters like the dotcom bust in 2000, the Great Recession in 2007 and most recently the Global Pandemic in 2019. These have had and continue to have major fiscal impact and making sure that we consider insurance to protect ourselves, our loved ones and our financial situations is not only prudent but fundamental in our financial security.
As a modern professional we are witnessing a digital financial revolution and are inundated with information and never-ending options. It is worth refreshing the framework for how to manage our personal financial situation to reflect our changing financial habits. With this updated Five-Pillar framework, you can take control of your personal finances and continue building your financial security.