The Beginner’s Guide to Mastering Your Money
By: Moreno Zugaro
Tags: Personal Finance, Self Improvement, Money, Saving, Finance

1. Listen to Warren Buffet’s Advice

Your earning power determines how much money comes in every month — whether it’s income from your job, money from rental properties, or YouTube dollars.

The simplest way to fill your buckets is to increase your inflow. But unfortunately, most financial advice completely ignores this, making your life unnecessarily hard. It’s a lot easier to increase your earning power by 10% than raise the return on your investments by the same amount.

“Your best investment is your own earning power.” — Warren Buffet

Here are a few simple ways to improve the amount of money flowing to your bank account every month.

Find a mentor

Having a great mentor is like putting your career on steroids. Find someone who’s where you want to be in five to ten years, reach out, and extract every little bit of knowledge you can. Most people are eager to teach if they sense you’re genuinely interested, and If it’s someone in your own company, you’ll also increase your chances of a promotion.

Improve your skillset

If you want to earn more money, you have to provide more value to your employer or customers. Check which skills are required for the positions above you and then work on mastering them. Most companies have programs that facilitate professional training — make use of them.

If you want to earn more money, you have to provide more value to your employer or customers. Check which skills are required for the positions above you and then work on mastering them. Most companies have programs that facilitate professional training — make use of them. Ask for a raise

This is obvious advice but that doesn’t make it any less valid. Your employer won’t offer you a raise on his own, so bring it up. Prepare well and the worst that can happen is a no — which is a perfect stand to get clear on the skills and performance you have to put forward to receive one.

This is obvious advice but that doesn’t make it any less valid. Your employer won’t offer you a raise on his own, so bring it up. Prepare well and the worst that can happen is a no — which is a perfect stand to get clear on the skills and performance you have to put forward to receive one. Start a side hustle

If your primary job doesn’t offer the necessary prospects, it’s time to make things happen on your own. There are myriads of possibilities for side-hustles and millions of people are doing it. Start that podcast, Shopify store, dropshipping business, or whatever piques your interest. Bonus points because you diversify your income and have better prospects in case you lose your main job.

Personal finance takeaway #1:

Increasing your earning power is a massively underrated source of cash. Unless you have huge amounts of money at your disposal, don’t worry too much about investing but rather increase your inflows. Earning 10% more is much easier than increasing your investment returns by the same amount.

2. Don’t Try to Fill a Leaky Bucket

Earning power is your inflow, expenses are your outflow. There’s no point in pumping more water into your buckets if they’re full of holes and your system is leaky.

Most people have no idea what they actually spend their money on. They just know that at month’s end, their diet consists of plain potatoes instead of salmon sushi. And if you don’t track your expenses, you’ll end up in the same situation.

“You can’t manage what you can’t measure.” — Peter Drucker

Tracking expenses for a few months has been a complete game-changer for anyone I know, including myself. Without it, it’s almost impossible to get an accurate overview of where your money goes.

The good news is that tracking your expenses is neither overly time-consuming nor complicated. Back in the day I used a simple Excel sheet, but nowadays you can use one of the many apps like Spendee, Prism, or Toshl.

When you track your expenses, put them into different categories such as rent, utilities, transportation, food, or shopping, and decide if they belong into your needs or wants. This alone will give you clarity on what blows up your budget and where you have the most potential to save.

A good rule of thumb to allocate your earnings is the following:

50% for essential needs

Stuff like housing, groceries, transportation, and minimum loan payments.

Stuff like housing, groceries, transportation, and minimum loan payments. 30% for wants

Fancy dinners, nights out, and going to the movies.

Fancy dinners, nights out, and going to the movies. 20% for saving, debt repayment, and investing

Pay past debts and invest for the future.

A word on saving: Most people associate cutting their expenses with something negative. Yes, you’ll have to restrict yourself — but the curse is a blessing in disguise. When you have to be more selective about what you spend your money on, you focus on what actually matters. No more $5 for a Starbucks every morning. No more buying shirts you wear once, let sit in your cabinet for a year, and then throw out. You don’t walk the Hedonic Treadmill anymore but instead opt for what brings you real joy.

The best way to get your spending behaviors under control is to hack away the unnecessary. Parkinson’s law will help you do exactly that.

Parkinson’s law — but for money

Tracking expenses is an eye-opener, but clarity alone doesn’t mean you’ll cut down your spending.

The original Parkinson’s Law says that “work expands to fill the time available for its completion” — in other words, a task will take as much time as you assign to it. This doesn’t only hold for work time but also for money.

If you allocate more cash than necessary for clothes shopping every month, you’ll spend it. But that doesn’t mean you can’t manage with less. Set lower limits and stick to them.

Personal finance takeaway #2:

You can’t manage what you can’t measure. Track your expenses down to the penny for a month or two and cut unnecessary spending. Restrict yourself and set lower budgets. Cut what’s unnecessary, and focus on what matters.

3. Don’t Go Tony Montana

When you increase inflows and fix leaky buckets, you inevitably end up with more money. Hooray, hooray! Now, before you go full Scarface and blow it all on hookers and cocaine, hear me out.

I’ve been in the very fortunate position that I’ve never been indebted in my life, but during my year of hitchhiking, I’ve come pretty close to a zero balance. I’m not gonna lie — being stuck in a foreign country with nothing but a few dollars to your name is scary. In these few weeks, I’ve realized the biggest benefit that even a small savings account brings: Peace of mind. You don’t need to worry if you’ll have something to eat next week.

Ever since then, I’ve kept a buffer of three months’ worth of expenses and rent. I never needed it but I sleep a lot better knowing that if worst comes to worst, I’ve got three months to sort things out.

You don’t have to be rich to not worry about money. You just need enough to know you’ll be fine for a few months and won’t have to starve. Saving isn’t super sexy, but it’s worth it.

Pay yourself first

Remember Parkinson’s law from a minute ago? You’ll spend as much cash as you have available. That’s why you have to pay yourself first, before you spend money on Starbucks, takeaway food, or Amazon.

Most people make the mistake of trying to save whatever’s left at the end of the month. This doesn’t work out well — you’ll always find ways to use up your budget. But if you save at the beginning of the month, you ensure you never run out of cash to pay who’s most important: Your future self.

No matter how much money you spend, I guarantee you that somewhere out there, there’s someone who does just fine with a little less. Set up an automatic deduction at the beginning of each month, and you’ll never have to worry about not having left anything to save.

Personal finance takeaway #3:

Pay yourself first. Save at the beginning of the month, not the end.

Set a security buffer by calculating the minimum amount you need to survive for three months, add 20%, and fill up your savings account until you’ve reached your target.

The money won’t generate a ton of interest, but it will give you peace of mind. And in the world of finance, this is almost invaluable.

4. You Won’t Beat the Market

Once you’ve filled up your buffer, you’re ready to get into the legendary world of investments. If you have easy access to a memory of spherical, heavenly choruses singing, now is the time to access it. Haaallelujah.

The world of investments is like a maze — easy to navigate if you have a map and a clear direction, but without them, you’re bound to get lost.

Most people make investing too complicated — they chase hot stocks, try to “time the market”, or look for insider tips that give them a competitive edge. But if highly overpaid hedge fund managers with vast pools of resources aren’t able to beat the market in the long run, why should you?

You’ll save yourself a lot of headaches if you choose a low-risk and low-maintenance investment and use the extra time to max out your earning power (see #1) or spend it with family and friends. Your choice.

No matter what investments you choose, here are three questions you should always ask yourself before you put your money anywhere:

What’s my risk appetite?

The stock market can be a wild roller coaster at times — and when prices go up and down, your emotions follow suit. Tech companies promise huge returns but can also lose double digits in a single day. Not a good choice if you easily get the jitters.

The stock market can be a wild roller coaster at times — and when prices go up and down, your emotions follow suit. Tech companies promise huge returns but can also lose double digits in a single day. Not a good choice if you easily get the jitters. How long do I want to hold this investment for?

Some investments promise a quick buck, others take years to pay off, so get clear on that before you buy. Don’t invest in technologies of the future if you want to pull the money next year.

Some investments promise a quick buck, others take years to pay off, so get clear on that before you buy. Don’t invest in technologies of the future if you want to pull the money next year. Can I hold onto it during bad times?

The best investment advice is to buy low, sell high. The worst investment advice is to do the opposite. When your investments plummet, it almost always pays to stick through. My portfolio lost around 30% in a few days when Corona first hit, but instead of panic selling, I bought more and made a sizeable profit in a matter of weeks. That’s where your security buffer comes into play — if you’ve got some backup money, you can wait for prices to recover before you have to sell.

I don’t have the time for a near heart attack every two weeks so I like to keep things simple and low-risk. My goal is a sturdy and reliable long-term system that I can use to automatically invest my excess cash every month. I want extra returns without a lot of extra hassle.

Most of my investments consist of monthly payments into ETFs — exchange-traded funds — that mirror a market. Put simply, if the market goes up, my investments go up, and vice versa. These monthly ETF payments are a great way to diversify your investments for lower risk and exposure. But is it also worth it from a financial perspective?

The power of compound interest

Over time, the average market return of the S&P 500 has been around 10% per year. Now, before you start drooling, keep in mind two things. First, this rate is subject to volatility — some years the market goes up 20%, some years it’s down by ten. Second, you still have to subtract inflation — the buying power your money loses every year — which has averaged around 3% over the last decades. That still makes for a net profit of around 7% per year — not too shabby!

If you now invest $300 per month for the next ten years at 7% annually, you’ll turn your overall investment of $36,000 into $50,000, which is quite a healthy profit.

Never underestimate the power of compound interest and long-term strategies.

Personal finance takeaway #4

There is no surefire and fail-proof way of investing — there will always be a risk. Even if you consider yourself an expert or smarter than everyone else, you likely won’t outperform the market — and you don’t have to. A monthly investment into an index fund or another comparable low-risk instrument provides a good balance of risk, return, and maintenance. Invest consistently and leave the rest to the power of compound interest.