Setting up our personal finances right can help grow our ASX share portfolios. I'm going to talk about three strategies that can help us ensure we have the right foundations for our money.
The most obvious thing to do with our finances is to spend less than we earn. That surplus of cash flow means investors can start putting savings towards financial goals. But, there are three things that I'd really want to make conscious decisions about.
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Have an emergency fund
Having an emergency fund is the idea of putting some money aside in a savings account for…an emergency!
We don't know when an emergency is going to happen, so it's good to have that money ready. Different households may have different possible worst-case emergencies. A young adult may want to have enough to replace their car if it's written off.
A family may want to have an amount big enough to pay for living expenses for three to six months if the main breadwinner loses their income. Three to six months would hopefully be enough time to get a new job.
Other unexpected personal finance expenses could be a broken fridge, travel for an interstate funeral and so on.
Having this money set aside can give us confidence to invest in ASX shares, rather than going for the most defensive ASX shares.
Don't take on 'bad' debt
In my mind, we don't necessarily need to take on any debt at all, apart from buying a property.
Taking on debt to pay for discretionary items could encourage us to stretch too far with our spending and it ends up costing our personal finances more because of the interest costs. Borrowing money is even more expensive now because of higher interest rates. Our personal finance choices can make a big difference in how much we can invest in ASX shares.
If we're going to take on debt, I think it's best used for assets that can go up in value.
Got a goal to pay for something? I'd suggest putting money into a high interest savings account. That way, we can make interest work for us rather than against us. Albert Einstein supposedly once said:
Compound interest is the most powerful force in the universe. Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it.
Invest regularly
I think a regular investment strategy with ASX shares is key for creating good long-term wealth with our personal finances.
Putting more money to work into ASX shares gives us the chance to find more opportunities and put more into compound growth by giving the portfolio more fuel.
Just putting money regularly into ASX-listed exchange-traded funds (ETFs) can create good long-term returns.
There are lots of different options – it can be a good idea to get diversified exposure to the global share market, with a pick like the Vanguard MSCI Index International Shares ETF (ASX: VGS).
