At the heart of personal finance is the concept of personal capital and the ability to manage it competently. We propose to understand the types of personal capital. Spoiler – there are three.
We will answer the questions of how to properly use money and make it work for you, as well as whether to invest in “Star Wars” figurines or sneakers.
Table of Contents
Current Capital
Exists in almost everyone’s possession. The purpose is to pay for our regular expenses (daily or monthly). This includes the following expenses: food, transportation, housing, utilities, loan repayments, etc. And when we think about saving money, the first thing we do is look at our current capital and look for ways to reduce those or other expenses. Planning and keeping track of expenses is half the success, this success can be compared to a successful company that knows how to make a paystub as an employer or a contractor.
The gurus in the management of current capital are those who, in addition to sound planning and accounting of funds:
- Are aware of the loyalty programs of banks whose cards they use (cashback, promotions, prize drawings, etc.), discounts and offers of payment systems (Mastercard, Visa, etc.), stores and service companies;
- Allow money to “mature”. For example, you should not spend immediately after receiving your salary to buy new clothes, wait and wait for sales. Put the money you receive in a savings account, and let the money work, and in the meantime use a credit card with a grace period and cashback. That way the money works for you twice as well – you’ll get both interest and cashback.
Don’t spend the money you earn, save it for unexpected expenses. In this way, a reserve capital will be formed.
Contingency Capital
Sometimes unforeseen events happen in life, some of which entail unplanned spending. The purpose of emergency capital is to have a safety net to get out of the situation without obvious financial turmoil. Ideally, the accumulated funds will help you stay with your life for at least three months and navigate through the new situation. For example, if you lose your job.
When choosing financial instruments to form your reserve capital, pay attention to such criteria as reliability. For example, the aforementioned savings accounts or short-term deposits.
A lot or a little – everyone will decide for themselves by their needs and monthly expenses, but to check with the savings this amount is worthwhile. In addition, pay attention to insurance products: health insurance, life insurance, etc.
Investment Capital
This type of capital can be a source of additional income or help achieve a goal. For example, repair, vacation, improvement of living conditions, savings for retirement, etc. The choice of tools to form investment capital directly depends on the goal and the level of risk you are willing to take:
- The more you want to earn, the more risk you must take;
- The more time you have until your goal is met, the more risk you can take since you will have time to choose new instruments;
- Allocate your assets into different financial instruments to reduce risk.
Bonus!
But if you want to get creative with investing, consider hobby investing. You buy a limited-edition item that could potentially grow in value, and then sell it to collectors. There are many options here, but choose what you’re better at sneakers, Lego sets, comic books, Star Wars figurines, art, celebrity items, coins, stamps, and more.
The main rule of most of these investments – it must be a rare collector’s item.
Let’s Look at an Example With Numbers:
The first model of Yeezy sneakers, made in collaboration with Adidas and on sale in February 2015 at $350 a pair, is now valued at up to $6,500. Meanwhile, in the first 24 hours after its release, the price soared to $17 million on eBay auctions. This is not surprising when you consider that the sneakers were released in only a few thousand pairs and sold out within minutes of the store’s opening. However, because of the frequent new releases and the artificial hype created by speculators, long-term price forecasting for shoes becomes problematic. The weakest points of investing in sneakers are low liquidity and a long waiting period for higher returns. Experts believe that now you can invest in the purchase of popular sneakers, expecting a good profit in 10-20 years.
Conclusion
To sum up, let’s answer the question in the title: how to live not from paycheck to paycheck – correctly allocate funds will allow you to have order in your finances, the process of formation of which is worth starting with planning and accounting of current capital, which will later allow you to form a reserve and then proceed to investments.