Warning! Are You in Control of Your 5 Main Personal Finance Needs?
The key to having more money than the average person and not having to worry about money is to have good “financial literacy.”
This means you don’t have to rely too much on accountants, financial advisors, etc., and can start to manage and direct your own money.
Classic financial planning says that knowing and understanding the 5 main financial needs in life is a good place to start on this path.
The 5 Most Important Financial Needs In Life
In traditional financial planning, there are five financial needs that a typical person will have, and these needs usually come up at fairly predictable times.
I think it can be helpful to write down your top 5 financial needs on a piece of paper and then ask yourself what you could be doing right now to make sure you are actively taking care of each of them:
The need to build up a lump sum from extra money (usually saved from earned income) to meet a financial goal or build up a fund for a rainy day.
This would be like putting away money for a down payment on a house you plan to buy in the near future.
Putting together an emergency fund is another way to save (e.g. setting aside 6 months living expenses).
You could also start saving with an eye toward a longer-term goal, like building up a fund for a rainy day or retirement.
The need to put a lump sum of money you won’t need for a while into something that will give you a better return than just saving.
One common way to do this is to put a large sum of money into cryptocurrency or stocks with the goal of getting a medium-to-high return.
This could also be the case if you just retired and got a lump sum of money from your retirement plan that you want to invest wisely.
You’d have a financial need to invest this lump sum in the best way possible (based on your age, risk tolerance, and financial goals) in order to get the best return on your money and/or a steady stream of (passive) income in the future.
The need to have money in case something bad happens, like getting sick or dying, and you and/or the people who depend on you have to stop working and stop making money.
When you get a mortgage, for example, you buy a life insurance policy (also called mortgage protection payment insurance) that pays off the mortgage in full if you die before the end of the mortgage term.
You can “protect” yourself in more ways than just by buying life insurance. For example, you can build passive and portfolio income.
Planning for retirement, which means saving money so that you have a replacement income (passive income and portfolio income) when you no longer work (either by choice or because you can’t) and aren’t making money.
The need to borrow a large amount of money to pay for the purchase of a property, usually an apartment (condo) or house that will be your home.
How Your Personal Financial Needs Tend To Change Over Time
As you get older, your financial needs tend to change.
A typical timeline for how a person’s financial needs change over the course of their life would look like this:
- Age 20 — 30: Savings & Mortgages
- Age 30 — 40: Protection & Longer Term Savings
- Age 40 — 50: Investment & Retirement Planning
- Age 60 — 70: Retirement & Low Risk Investing
This is a very general timeline, so keep that in mind. Planning for retirement is something I think should be done a lot earlier in life.
People are living longer than ever before, but fewer and fewer people are planning and saving for their longer-than-ever financial needs in retirement.
People spend 5 times more time planning their vacations than they do their retirement, I’ve heard. It’s sad, but it’s the truth!
Learning How to Be Your Own Financial Advisor
Personal financial planning is something you can do on your own or, more likely, with the help of a financial advisor.
The goal of financial planning is to help you reach your financial plans and goals by making the best use of the money you have and using financial products in the right way.
Most people don’t have the skills to plan their finances on their own, so they rely too much on financial advisors and institutions.
A Note of Caution
Only a small number of financial advisors really care about what’s best for you. Sorry, but it’s true.
Many are just trying to sell you financial products for fees and commissions.
The only financial advice worth taking is advice that costs money and is written down.
I’m afraid this is as close as you’ll get to getting financial advice from someone who doesn’t work for the bank.
At least if you pay for the service, you know the financial advisor will do what he says he’s going to do instead of selling you financial products that may or may not be right for you and getting commissions from the financial institution that sold them to you.
It has never been more important today to learn about money and be your own financial advisor.
I’m not saying you shouldn’t have a group of financial, tax, and legal experts you can ask for help. Do!
But what I’m saying is that you should take charge and learn about your financial needs and the strategies, tools, and techniques you’ll need to meet them.
To get rich and make more money than the average person, you have to be at least a little bit your own financial advisor.