5 things you need to know to master personal finances

Proper and careful investment will result in growing your wealth. (Rawpixel pic)

Taking care of your personal finance is the way to reach financial freedom, based on three broad categories of net worth and accumulation of wealth.

Prodigious accumulators of wealth (PAW) have multiple assets and investment streams, without cash flow worries, and are focused on growing wealth.

Average accumulators of wealth (AAW) have positive cash flow and some investments, but no extra money to save and invest.

Under accumulators of wealth (UAW) have little to no investments, may be young and just starting out, or in consumer debt.

Here are the five fundamentals you need to know about personal finances:

1. Increasing income

An increased income gives you improved cash flow and allows you to invest your business for further growth.

  • Prodigious accumulator of wealth (PAW)

You probably have money sitting around. Invest in business, the stock market or property. Give yourself flexibility in how you spend your time and resources.

  • Average accumulator of wealth (AAW)

You may be juggling your funds to save and invest while paying your monthly bills.

It makes sense to look for both active and passive income. This can include turning a hobby into a business, driving for a ride-sharing service or even working part-time at your local Starbucks.

  • Under accumulator of wealth (UAW)

You need to be disciplined and make significant changes in your life. Are you underpaid or struggling in your business? Can you honestly say that things will change in the next 12 months?

If the answer is no, you need to take the difficult but necessary steps to change. Although change is difficult, it is a necessary process to regain control of your life.

2. Reduce expenses

As you increase money coming in, reduce money going out. It is necessary to reassess your “wants” versus your “needs”, to determine how to stretch your Ringgit while maintaining a lifestyle you’re comfortable with.

  • Prodigious accumulator of wealth (PAW)

As income rises, lifestyle choices grow increasingly expensive too. The “must have” luxuries start adding up significantly and rapidly.

Take a step back and assess your spending to identify where cutbacks are needed.

Work with a Personal Finance Adviser to determine spending that significantly affects your cash flow and work on reducing these expenses.

  • Average accumulator of wealth (AAW)

Spend on what is important while trimming the fluff. Be aware that for every RM100 you save you are actually saving RM466 (4.6 times) if you take compounding returns at 8% into consideration.

Inculcate a regular savings and investment plan to grow your money.
  • Under accumulator of wealth (UAW)

Even if you are earning a five-figure salary monthly, you will still be in the UAW category if your spending is more than your income.

What are your major expenses? Are you spending on things that you do not need? Are you in credit card or consumer debt that needs clearing off without taking on more debt?

Set goals to reduce your total spending to below 60% of your net income.

3. Invest wisely

Your money needs to grow to keep up with inflation. Investing your money will help you from falling behind. Leverage on compounding interest returns.

  • Prodigious accumulator of wealth (PAW)

Being a PAW gives you the luxury of time and money to choose the best investments which provide above average returns, as there is a smaller pool of investors at your level.

You still need to sharpen your knowledge and expertise and engage with the experts to focus on making profitable investments.

  • Average accumulator of wealth (AAW)

You have enough bullets to take some shots. Make those shots count by diligently doing your homework.

With some wise investments, you may find your resources growing five to tenfold, making you well on your way to PAW-land.

  • Under accumulator of wealth (UAW)

A common myth that holds UAWs back is that you need a lot of money to invest. The good news is that as a UAW, it is all proportionate.

If your income is lower, your expenses are likely to be lower as well. The goals that you need to reach are proportionately easier to reach.

4. Avoid big mistakes

  • Prodigious accumulator of wealth (PAW)

Live modestly. Get professionals to help you plan for a trust fund and a succession plan for your children. Avoid putting all your eggs in one basket, just in case that basket falls.

  • Average accumulator of wealth (AAW)

Not everything that glitters is gold. Avoid anything that promises high returns above 15% per annum.

A major mistake can set you back financially for years and may have an even longer psychological impact.

  • Under accumulator of wealth (UAW)

You need to know where you are and how to grow your financial muscle to achieve gains.

Avoid biting off more than you can chew or investing in dubious schemes. It may be difficult at first but once you gain momentum, it will be impossible to stop you.

5. Enjoy an abundant life

As long as you’re alive and well with food on your table, you are significantly better than 80% of the world’s population.

Money is indeed nothing more than a number which you cannot take with you on your passing. What matters most is how you use it to live a worthy life for your loved ones and those around you.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.