Why? I'm glad you asked!
The Second Principle of Safe Investing is protecting your money against loss, and that is the point of personal money management; making sure you are protected from losses in your personal finances and your trading.
It is a combination of two activities: personal financial management and trading money management.
When used properly, it limits the amount of time you spend worrying about money and reduces the impact of mistakes you make along the way. When avoided, the profits you make (regardless of their source) will be consumed by things like credit card debt, mortgage payments, those $4 lattes from Starbucks, or "Mr. Market".
The personal financial management half of personal money management combines 3 areas:
The trading money management half of personal money management combines 2 areas:
Most people only discuss personal money management AFTER something goes wrong, but that won't take the sting out of a loss. The silver lining is that "better late than never" also applies, as it is never too late to make improvements to your investing system (Safe Investing Principle #9).
Investing techniques often focus on finding an investment instrument (stock, bond, ETF, fund, etc.), but rarely discuss how much money to use. Instead of providing you long term success, you've been set-up for a fall.
Nothing is more frustrating than spending hours and hours selecting the "right" investment, only to watch the market crash (as many investors learned during the second half of 2008).
When you don't practice trading money management, your investing gains are temporary because you ended up putting all your gains into the right investment, at precisely the wrong time.
Similarly, personal financial statements provide you with a scorecard as to how well YOU are managing money.
Since most people start investing to improve their financial situation, it pays to know exactly what that situation is before doing anything else. We have an entire section dedicated to help you create your own personal financial statements, such as a personal balance sheet and a personal income statement.
The answers to these two questions will set the stage for your personal financial goals.
As a starter, we've compiled a list of 8 personal finance goals, for those of you just starting out.
After completed all of them, you can honestly say that you have control over your personal finances. These steps can even be used as thought starters for your first financial investment advice session.
Please note that these questions and the related goals are not meant to take the place of professional financial investment advice.
Instead, use them as a way to prepare yourself to find the right advisor for your situation (Is Your Financial Advisor a Yes Man?).
Maybe setting goals is not the problem; the progress just isn't there. This situation is extremely frustrating...even more so when you discover that the issue isn't with the goal itself, but the process used to set it (see...there is that process word again!).
Your goals must to be structured a specific way and the S.M.A.R.T. method is the best one out there.
And your new S.M.A.R.T. personal financial goals tell you where you want to be.
It is time for you to map out your plan to get where you want to go by establishing a realistic budget.
Now comes the hard part...sticking to your plan!
Remember, your plan can change (and most certainly will), but that is no reason not to spend some time on it. It will act as a guide to your decision making process (which is what this site is all about, after all), and give you insight into the future affects your decisions will have (good, bad, or otherwise).