The Complete Guide to Personal Finance for Everyday Folks

Money is a taboo topic for many people and in many cultures. We shouldn’t talk about how much we make, how much we spend, and even what we think about money. This causes many of us to live with dated and dangerous concepts of money picked up from parents, teachers, and those wishing to influence us on social media.

It only becomes worse when you’re a creative. As a music producer, writer, designer, or entrepreneur, our work, more often than not, is judged by how much we make. It almost feels like, if you’re not earning a good income your art is terrible. Thus, even fewer of us in the creative field want to talk about money.

The truth is, having more or less income and wealth have very little to do with the quality of your art. Often, it’s about how you manage them when you have — or don’t have — them.

As a writer, I love the fact that my personal finances work for me in the background because I don’t want to think about money all the time. I’d rather spend my time and energy on writing better articles and marketing them to more people as a way of increasing my income.

However, not thinking about your money doesn’t mean giving up clarity and ignoring it. Instead, it’s about creating a simple system to manage it with minimal energy and time. And in this guide, I’m going to show you my principles when it comes to managing my own money and how you can do the same to make more and spend efficiently.

What is this not about?

Before I get into the meat, I’d like to mention that this is not a piece of financial advice. This is just a framework (my personal framework) about personal finance for your reference. You won’t find any specific details about accounting and banking because I’m not an accountant nor an economist.

Although I believe this guide will be useful to anyone, I’m writing this as a writer and entrepreneur. That said this personal finance guide is best for people who make a living with creative work.

Top 5 principles of living a rich life

The first thing to learn about personal finance — and money in general — is not how to manage them, but how to see them. Your beliefs about money dictate how you spend and how much you can make at the end of the day.

The problem is that most people have this in reverse. They first focus on how much they make then spend everything once they have it. That cycle leads to a less ideal belief about money.

Just like you, I first learned about money from my parents. Unfortunately, these money principles are not perfect. Over the course of my life, I read countless books about personal finance, experimented with the money strategies I learned and dumped the ones that didn’t work well for me.

Out of all the strategies I learned, I created the top five personal finance principles that work for almost everyone and that briefly summarize how I look at money.

1. A rich life is not just about money

Due to financial scarcity during my childhood, I decided to become rich one day in my life no matter what it took. However, the only concept of “being rich” I got at that time were the things I heard from my parents and the articles I read in magazines.

Thus, I developed an incomplete belief about money — and life generally — that the sole goal in life is the chasing of more money. But the more I learned (from both accomplishments and failures), the more I found that living a Rich Life isn’t just about making and having more money.

People can have a lot of money but still feel miserable. At the same time, people can perform at their best to generate more income when they have the right mindset and a better motivation other than just money.

For me, living a Rich Life means having clarity towards my goals, the courage to work hard, the ability to perform at my full potential, and the freedom to choose the life I want to live. And this brings us to the next principle.

2. Define your lifestyle and the opportunity cost

The very first step in creating a personal finance system that works for you (not me, your parents, or anyone else) is to be clear about what you want and where you want to go. Instead of planning your life based on how much you make define the lifestyle you want to live, find out how much you will need to fund it and then reverse engineer the process.

I know that it’s much more challenging to actually do than to say. However, it’s not practically impossible. I first learned about this from the book The 4-Hour Work Week by Tim Ferriss on lifestyle design.

Delaying gratification is crucial to success in many areas but I’m not a big fan of forcing yourself to do something you hate or starving yourself for years, just for the sake of future financial gains. I think both can be achieved at the same time with two simple things:

1. Actively creating and buying assets that generate passive income or income with minimal investment of time and energy.
2. Understanding opportunity costs which basically means you can’t have everything at the same time. For example: if you want to become a digital nomad don't get a 30-year mortgage loan.

3. Spend less than you make

Knowing what lifestyle you want to live and what contributes to your own version of a Rich Life is half of the process. The essential principle in personal finance is this:

Spend less than you make.

This principle is obvious and has been repeated again and again by many financial experts. However, very few people are doing it because society encourages us to spend more. The math just doesn’t work out when you spend more than you make and many people get into debt because of this.

Saving serves many purposes, one of which is to invest for future gains. In my own opinion, the three most important reasons to have extra disposable income are:

1. Emergencies. Many things happen which are out of our control. Having an emergency fund provides a financial cushion to keep us afloat in case we lose our job, have an accident that disables us, or in case we want to offer help to our friends and family members.
2. Breaking the paycheck to paycheck cycle. 78% of the population lives paycheck to paycheck, waiting for the salary to come in to pay the bills each month. Having extra cash to settle the bills before the next paycheck is a huge relief because you get to make better decisions in a less stressful environment.
3. Funding your personal venture. The number one reason people put off the dream of owning their own business is the lack of start-up capital.  Some get into debt to fund their own business and operate under the stress of having to pay it back. Having a small amount of start-up capital enables you to become more flexible in taking risks.

4. Start investing early

What do you do with the extra income after deducting your expenses? Invest it. And the earlier you do this the better your future will be.

The best time to invest is yesterday, and the second best time to invest is today.

I’m not just talking about investments like stocks, bonds, and other investment vehicles, I mean more than that. I see investment in three different categories:

1. Self-improvement. Start by investing in your health, skills, and personal growth. You can lose all the money you make but not the wisdom, knowledge, and skills you gained. And these are the intrinsic values that provide you with security, not your employers or investment portfolio.
2. Business. The creative industry is a business itself. You’re creating values out of nothing but your ideas and hard work. Now, learn to sell them. A business is an excellent asset that increases your total income and cash flow. At the same time, you have more control over it than any investment you make that is managed by others.
3. Passive investment vehicles. These are the traditional investment vehicles like stocks and bonds. They help preserve the value of your money, generate small, passive income (for the short-term), and compound to a large sum of money over the long run. Unless you’re a trained professional investor, you want to diversify your money here and keep them in the market for long-term.

5. Plan for the future, manage the present

When we talk about personal finance, we’re thinking and planning for our future. We think about how to make more money in the future, what to do now to ensure our financial well-being in the future, and how to preserve wealth for decades to come.

Planning for the future is great. However, most of us can’t differentiate between planning for the future and managing the future. One mistake most people make here is that they don’t move on to execute after the planning and instead, start trying to manage the future.

They think about how much they’ll make five years later, what they want to do with all the money they have 10 years later, how good their life will be in the future — without pulling themselves back to current reality to manage their money.

The difference between planning for the future and managing the future is this: The latter is impossible.

The worst advice I have read from personal finance books is that to become rich, you have to live like a rich person now. This single piece of advice almost ruined my life. Instead, to become financially free in the future, think and act like a rich person, but do not spend like one.

(Not all rich people are good at managing money, so be careful when you’re following someone else.)

Basic personal finance terms and reports you need to understand

Now that you have learned the top five principles of personal finance, it’s time to dive into some basics. To master your finances, you need to know how to read financial reports. The truth is, you don’t need to be an accountant to do this. Below are a few basic terms and reports you will need to understand.

(Anything outside this list is not important unless you decide to nerd full out in personal finance OR become a professional investor.)

Income statement

Income statement is the report that records your income and expenses. It gives you a clear glance of how much you make, how much you spend and where you make or spend them. This report doesn’t only provide clarity about how money flows in and out, it’s essential when filing your tax report.

Cash flow

Cashflow is the single most important metric in your income statement. It’s your income minus your expenses. It’s the amount of money you have left each month. More cashflow doesn’t mean you’re financially free but it means you have more freedom to spend this extra income for your future.

Balance sheet

The balance sheet is another report you need to understand. It’s a statement of the assets and liabilities you have at the moment. Quoting the book Rich Dad Poor Dad by Robert Kiyosaki, an asset is something that puts money into your pocket and a liability is what takes cash out of your pocket. Therefore, the goal here is to have more assets than liabilities.

Net worth

Net worth is the number you get when you subtract your liabilities from your assets. Which basically means how much, in money value, you have if you liquidize all your assets and liabilities. Your net worth could be a negative value when you have more liabilities than assets. It serves as a benchmark for your financial health, But not all assets can be liquidized at the same time. I think this number matters more when you’re making significant and long-term financial decisions compared to smaller day-to-day spending decisions.

The 4 rules of budgeting

Some financial experts will swear on their life about the importance of budgeting while at the same time, other experts strongly advise against it. And both groups have strong reasoning behind what they preach. What about me? I encourage you to start budgeting. I believe budgeting will change your life because it provides financial clarity for your current situation and helps you make better financial decisions for the future.

Some think that budgeting is what poor people do, simply because they see it as penny-pinching, saving every penny, and being cheap. However, that’s not the truth, at least not what I mean when I encourage you to budget.

I always did budgeting, but as turns out I was just recording my expenses. Compared to people who don't take control of their cash inflow and outflow at all recording expenses was good enough to know my spending habits. The problem was that recording my spending was very different from managing it.

Budgeting is not about penny-pinching. Budgeting is about managing your priorities.

Now, I see budgeting as managing my priorities. Instead of recording my expenses, I define what a Rich Life means for me and what’s essential for me now (see the top 2 money principles). I categorize places and things I want to spend money on every month and set a budget for each and every single one of them.

When the paycheck or side income arrives. I’ll spend it according to the budget I’ve made for myself. Here are the four rules I follow for budgeting.

(I didn’t create this definition and rules of budgeting myself. I learned all of these from YNAB, a budgeting tool called You Need a Budget. I’ll talk more about this later.)

Rule 1: assign every dollar a job

This is an obvious budgeting rule but we usually don’t do it. Every single dollar you earn is going to do something for you. It might be filling your stomach with food, making sure you have electricity, or earning more money for you.

At first, I didn’t do this. Before, when I was recording my expenses, I never planned in advance how much I should or I could spend for each category. The second reason why most of us fail to do this is that we don’t assign a specific amount of our savings, or emergency funds, or anything we don’t spend right away. This usually leads us to spend it on something else at the end of the month.

Assigning every dollar a job means giving your money a specific task before you get it. This way, you’re not second-guessing how to spend it or spending impulsively. It’s not just a budgeting rule, but a new way to think about money.

Rule 2: embrace the true expenses

This second rule alone benefits me the most. We always have some big thing that we are not paying on monthly such as birthday gifts, insurance premiums, and vacation expenses.

The idea here is to set an amount aside monthly for these large expenses. With this rule, you won’t feel burdened by paying a big amount in a particular month because you have already prepared for this in advance.

Rule 3: roll with the punches

The third rule makes a difference between people who hate budgeting and people who love budgeting. Many people see budgeting as penny-pinching. They think they shouldn’t change the budget once the money is allocated.

The truth is, life doesn’t always happen as we plan it. Being inflexible with your budget only makes you hate the process. Instead of beating yourself up when you can’t stick to the budget, ask yourself why and adjust the budget accordingly.

For me, I took six months to get my food budget right. I kept overspending on dining out, and I used to hate myself for it. But when I observed deeply, I found two things:

1. My lifestyle encourages me to eat out.
2. I see work as a bigger priority than buying groceries and cooking at home.

At the same time, I noticed that I don’t spend as much on clothing. So my solution is just moving the extra budget I have on clothing to food.

After all, budgeting is supposed to be fun, just like we’re supposed to enjoy life.

Rule 4: age your money

After months of budgeting with the three rules above, you’ll start to understand your spending habits and learn to control your expenses. Now, here is one goal for you to achieve: Age your money.

It’s a fancy way of saying accumulating cashflow, which brings us back to the third money rule: to spend less than you make. You want to set aside a certain amount of money FIRST before you even spend on anything else. Many personal finance experts call this Pay Yourself First.

Putting aside money for starting a business and investing or setting aside a small portion of your income does one thing: it breaks the paycheck to paycheck cycle.

Imagine you can stop waiting for your paycheck to pay your bills. Imagine you don’t need to starve yourself at the end of the month because you’ve used up all your cash. Imagine you can start focusing on your work and life without worrying about when the money is coming in.

You don’t need to become rich to experience this. All you need is to spend your last month’s income this month. The secret is to accumulate your cashflow slowly until you get there.

The best budgeting tool

It’s tedious to set a budget every month and record every single expense you have. I used to do this using a notebook, in a spreadsheet, then with budgeting apps. Among all apps, the best budgeting tool I stumbled across is YNAB, which stands for You Need A Budget. I’ve been using it for over three years and have recommended it to my best friends, family members, and my girlfriend to use it too.

Here is why YNAB is the best budgeting tool you can find in the world:

1. Powerful budgeting concepts. A useful technology only becomes better when applied to great concepts and YNAB nailed it. YNAB was developed based on strong money principles and budgeting rules. (The four rules of budgeting are concepts taught by YNAB) At the same time, they are actively generating content — blog posts, YouTube videos, and webinars to help their users achieve their financial goals.
2. Auto-generated reports. Forget about keeping a record of your expenses, it’s tons of work to just create your personal finance reports. YNAB solves that problem. You can create accounts for cash, assets, and liabilities Then with your day-to-day record of income and expenses, YNAB generates Income statements, Expenses Reports, and Net Worth Growth for you automatically.
3. Support and updates. The last thing worth mentioning is YNAB’s support and updates. It has changed a lot since the first day I started using it. The team is constantly improving the user interface and experience of the tools.

The only caveat is that YNAB is NOT a free tool. It costs $84 per year to use it. However, I see it as a good investment everyone can make. You can try for free for 34 days before making a commitment to pay for it.

YNAB doesn’t pay me anything to say all of these things. I just love it so much that I can’t recommend it enough. However, they have a referral program for existing users. So if you pay for YNAB after the 34 day trial via my link above, I get a free month of YNAB. (Anyway, there’s no extra cost to you.)

3 steps to making smart money decisions

We’re animals of emotions. Even with the money system in place, it’s still difficult sometimes when comes to making big money decisions. We’re constantly juggling between things we want to buy and things we should be buying. This process consuming more energy than you think.

To make it easier and more effective when making spending decisions, here are three tips I have for you.

1. Set non-negotiables

It’s critical to know upfront what you should and need to spend on. Budgeting helps you do this. Businesses and companies are trying to make the process of buying friction-less to encourage us to buy more. If you don’t think about where your money should go, others will make the decision for you. And it’s definitely not your own pocket.

2. Automate your money allocation

I get it, we’re busy. That’s the point of this personal finance guide — master the principles, set up a basic framework, budget regularly and stop worrying about money again. One thing I don’t include here is the technical details on how to automate your savings, bills, and payments. However, it’s important because you can finally think less about money and do more work.

3. Validate big ticket expenses

Spend small amounts upfront before big spending. It’s hard to decide if we should spend the money especially when it comes to big expenses like moving to a new city, upgrading your laptop, or buying a car. One thing I learned from Noah Kagan is that most decisions are reversible. Before making these decisions find ways to test them out like staying in an Airbnb for a week in the new city or getting feedback from friends about the new laptop you want to buy.

Simple expenses framework

Instead of constraining how I spend based on how much I make, I prefer to plan how I want to spend first and find ways to increase my income. This simple technique will help you think outside the box and motivate you to take control of—not just your expenses—but also your income.

If you’re a freelancer or an entrepreneur with no fixed month-to-month paycheck this becomes even more important. It helps you to make better financial decisions at every stage of your business.

One other benefit of setting up these expense allocation plan is that you can now acknowledge how much you actually need to live your dream life. More often than not, you don’t need to become as wealthy as you think to start living your desired lifestyle.

I suggest you take them as a reference and develop your own expense framework based on your goals and priorities.

Minmum viable income

This is an amount we need to keep ourselves alive. It usually includes a small amount of savings (for emergencies) and the basic living expenses. The primary focus when (or if) you’re here is to find a new job (or new sources of income) and pick up new skills that can be easily converted to more income.

Comfortable living income

If you’re born in a decent family, have parents who figured out your basic living needs, and went to college with strong financial support, you’ll probably end up here when you complete your studies.

A big mistake many people make at this stage is that they start to spend their money on luxuries. Rather than buying things you don’t need, I suggest spending the extra cash on the five things below:

1. Lifestyle upgrade. Living on the minimum viable income sucks. I don’t recommend you to stick to that. With the extra money at hand, you get to upgrade your lifestyle but never overspend on luxuries.
2. Self-improvement. The best investment we can make is to invest in ourselves. Spend your money on improving your health, your knowledge, and your skills.
3. Network. Your network is your net worth. Allocate your income to building meaningful relationships. Just like the investment in self-improvement, true friendships stay with you forever.
4. Retirement. Put aside some money for your retirement. You can also split this amount and invest it in the market at different risk levels.
5. Business and investment. Set aside money to fund your own business ideas. If you don’t invest in your own business, how can you convince customers or investors to invest in it?

Remember to save for emergencies during this stage, start aiming for an amount that is equivalent to your expenses for three months, and slowly increase this to six months and even twelve months.

Full potential income

It’s hard for me to write about the final stage because I’m not there yet. However, I think we reach this stage when our basic living expenses are roughly 20% to 30% of our income. Then, we get to spend the remaining amount to maximize everything else such as self-improvement, network, business, investment, and luxuries occasionally.

How to make more money

As a creative, your primary goal shouldn’t be money. You’re in the wrong place if you’re in this for the money. There are many ways to make more money out there.

However, we still need money to survive and put food on the table. And money is a great resource to fuel and scale our passion into a bigger thing. Getting to perform and express ourselves creatively without the financial stress is the ultimate dream, and more disposable income means we have more room to explore and improve.

I agreed with Jeff Goins and Ryan Holiday that real artists don’t and shouldn't starve. Making more money may not be the primary goal, but it’s equally important to our career (because saving more is not the answer). Here are five tips I have for you to achieve that.

1. Have a job. Being creative is hard, you need to put in so much work before it pays off. Having a job provides a certain stability while you’re building something for yourself. Get a job you love and take this opportunity to improve your skills and build your network.
2. Find convergence. Your art doesn’t sell if no one wants it. Convergence represents the overlapping space between what you care about and what other people are willing to spend money on. (Read The $100 Startup)
3. Build your network. Your network is your net worth. Surround yourself with positive, hardworking people with the right mindset and build genuine, strong relationships with them.
4. Cultivate an audience. Whether you’re producing music, making films, or publishing books, you need an audience. Don’t start building your audience when you’re launching your work, start now.
5. Master marketing. The first step is to create your best work then spread your work to the right audience. To excel professionally, everyone needs to master marketing -, not just their products, but themselves.

Frequently asked questions

Before I sign off with the conclusion, here are a few frequently asked questions about personal finance. Some of these are the questions I got asked a lot, some are questions I include because they are helpful (and fun).

What are the best personal finance books that you recommend?

Here are the three personal finance books that I highly recommend:

1. Think and Grow Rich. This book will show you that becoming rich is not about what you have, but how you think and what you do. You can read my reading notes here.
2. The Richest Man in Babylon. This book focuses on two core ideas: (1) Save first before you spend, (2) Invest in compound interest.
3. Rich Dad Poor Dad. This book has an enormous impact in my life. It elaborates the balance sheet and income statement in a way that favors you instead of the banks.

I wish I could recommend I Will Teach You To Be Rich by Ramit Sethi but I can’t — not because it’s not good — because I haven’t read it yet. I like Ramit’s work, so check his blog out here.

I have many commitments, and I have nothing to spare for savings. What should I do?

In this case, instead of focusing on how much you need to save, concentrate on two things:

1. Increasing your income.
2. Forming a habit of saving regardless how little it is.

Should I have a credit card?

A distracted mind does what it does best. People who lack focus can block all social media sites but still find ways to procrastinate. The same goes for getting into credit card debt.

If you’re in pressing credit card debt, get rid of it now.

If you don’t have any credit cards yet, check your spending habits instead. Do you save before you spend? Do you usually have any cash left at the end of the month? Do you spend impulsively?

If you have a proper money mindset and system in place, credit cards can be your best friends. If not, they will eventually ruin your financial future.

Should I buy a house? Should I buy a car?

It really depends on your lifestyle goals at the end of the day. Will you move frequently? How often do you drive? What about renting a house or a car? These are some questions you need to ask yourself.

For me, I think a house is still practical and relevant. However, my goal is not to buy a dream house. Instead, I see buying homes as a form of investment for increased cashflow and future capital gains.

As for cars, I don’t drive that much. And I believe that the transportation and automobile industry is going through a massive evolution soon which could make owning a car no longer a necessity.

In term of how to spend on houses and cars, here's a Quora answer by Gordon Miller I read recently that I think is interesting and helpful. He has also written quite a few answers on personal finance that I want to implement.

What’s the best strategy to pay back debt (school loans, credit cards, etc.)?

The best strategy is not to get into debt. The second best strategy is to pay back your debts as soon as possible. Spend everything after your savings and living needs are met on paying off debt. If you have just a few debts to pay off, tackle the smallest one with the highest interest rate first.

College loans are tricker compared to other debts. I suggest you check out Student Loan Hero for more professional advice.

Should I invest in Bitcoin (or cryptocurrencies)?

It depends on how you see it. I personally think the technology behind Bitcoin and cryptocurrencies in general, (known as blockchain) holds a lot of promise and has lots of potentials.

However, they are still a form of currency even if they are better than the fiat currencies we have right now. That said, they are just a tool for transactions but not the transaction itself.

The real financial freedom doesn’t come from trend or buzz but from the value you can create and provide to others. As long as you’re solving a problem that people are willing to pay for it doesn’t matter what form of currency you’re using.

Do I really need to give up on my latte? (I can’t live without them)

If you can’ live without them, don’t give up on them. If you love latte very much but are still considering whether or not you should give it up to become financially free, Ramit Sethi has the best answer for this.

Gaining Total Clarity with Honesty

Congrats for coming this far to the end of the article. We’ve covered a lot here.Mastering your personal finances doesn’t mean getting rich overnight. Instead, it’s about moving toward your desired lifestyle at a sustainable pace and living it stress-free with clarity when you accomplished it.

The truth is, everyone knows the best practices for personal finance, but very few people are actually doing anything about what they know. In other words, mastering your personal finance is 90% psychology and 10% math. And the best place to start is to be brutally honest with yourself when comes to managing your money.