December is approaching – the month when it is necessary to make gifts to relatives and friends, which means that your finances risk going into a deep negative. Let’s figure out how to prevent this: you can learn financial literacy on your own, but it’s better on other people’s mistakes.
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Pareto Principle
Many people who have studied statistics have heard of the Italian sociologist Vilfredo Pareto and his principle, the 80/20 balance. Pareto deduced a pattern: 20% of efforts give 80% of the result, and vice versa. But this principle of imbalance is true in many areas of life: only 20% of customers bring 80% of the company’s profits, 20% of drivers make 80% of accidents, 80% of the books read only worsen eyesight, but do not make you smarter or more talented. You can continue indefinitely.
The Pareto principle applies to personal finance as follows: we spend 80% of our income, and we save 20%. You can even go into detail: we allocate 50% of the funds for necessary, obligatory needs: utility bills, buying groceries, paying for children’s clubs, etc. 30% goes to recreation and entertainment, and 20% goes to savings.
Black Friday every day
Think of grocery stores, where you can almost always buy certain items at yellow price tags. Promotions and special offers allow you to save money, but this system has one drawback – you have to set the table from what is on offer. and if you need something more than what is offered, then you will have to pay the full cost.
Earning cashback, you can simultaneously try once or twice a week to completely abandon spending. For example, from the same cups of coffee to-go or business lunches in favor of homemade food. It is believed that it is most difficult for a person to live a day and not spend a penny on the weekend, since we have a lot of free time and when visiting, for example, the same park, not fountains, but pavilions with ice cream will catch your eye, and hands will automatically reach for the wallet. Wasting money is a bad habit that a literate consumer will definitely get rid of.
When developing a philosophy of reasonable economy, do not be afraid to pass for a miser. Remember Ingvar Kamprad, the founder of IKEA? As the richest person in Switzerland, he used the same chair for 32 years and was once stopped by the Businessman of the Year award guards for arriving by bus for the awards ceremony. What difference does it make what people think of you if you have a solid bank account and you are not afraid of the next economic crisis?
By the way, financial literacy helps a lot to maintain mental health, as having a financial airbag will make you less sensitive to the fear of losing your job. But frugality is only one of the principles that will lead you to financial independence. The second important component is the ability to expand your income and increase capital.