Overview

It’s not about how much you make; it’s about how much you keep. Personal finance is the application of financial principles to your own life.

Core Idea

Live below your means. Spend less than you earn and invest the difference. It’s simple math, but hard psychology.

Formal Definition (if applicable)

The 50/30/20 Rule:

  • 50% Needs (Rent, Food).
  • 30% Wants (Fun, Travel).
  • 20% Savings/Debt Repayment.

Intuition

  • Emergency Fund: 3-6 months of expenses in cash. (For when the car breaks or you lose your job).
  • Compound Interest: Start early. $1 saved at 20 is worth $10 at 60.
  • Debt: High-interest debt (Credit Cards) is a fire. Put it out immediately.

Examples

  • 401(k) / IRA: Tax-advantaged retirement accounts.
  • Index Funds: Low-cost, diversified investing (Vanguard).
  • Fiduciary: A financial advisor who is legally required to act in your best interest.

Common Misconceptions

  • “I don’t make enough to save.” (Even $10 a month helps build the habit.)
  • “Investing is for rich people.” (You can start with $1.)
  • “Buying a house is always better than renting.” (Not always. Renting offers flexibility and no maintenance costs.)
  • FIRE (Financial Independence, Retire Early): Saving 50%+ of income to retire in your 30s or 40s.
  • Credit Score: Your financial report card.
  • Inflation: Why you need to invest, not just save (cash loses value).

Applications

  • Budgeting Apps: Mint, YNAB.
  • Life Planning: Buying a home, paying for college.

Criticism / Limitations

“Latte factor” advice (skip coffee to get rich) ignores structural economic problems like stagnant wages and high housing costs.

Further Reading

  • Ramit Sethi, I Will Teach You To Be Rich
  • Housel, The Psychology of Money