Mastering Levels 1 and 2 of Personal Finance: Expenses, Debts, and Savings

Introduction

Hey there, fellow money masters! In my previous blog, I talked about the five levels of personal finance, and today, we’re diving into levels 1 and 2. Why are these two levels so important? Because they’re interconnected and can take the longest time to overcome, especially as a full-time employee like me!

Level 1 is all about basic cash flow and fundamental needs like food, utilities, and housing. Level 2 is about creating a safety net for your finances. These two levels mainly revolve around three themes: Expenses, Debts, and Savings. Let’s dive in!

Expenses

Expenses are the costs incurred in the process of living your life. They can be divided into two categories: fixed and variable expenses. Fixed expenses are those that remain the same every month, such as rent or mortgage payments, car payments, insurance premiums, and subscription fees. Variable expenses, on the other hand, fluctuate based on your usage, such as groceries, utilities, entertainment, travel expenses, and credit card bills.

It’s vital to keep track of your expenses to understand where your money is going. You can do this by creating a budget and sticking to it. A budget helps you identify areas where you can cut back on spending and save more. It also helps you prioritize your expenses and allocate funds accordingly.

Debts

Debts are the money you owe to someone else, such as credit card balances, student loans, and mortgages. While some debts are considered good debts, such as those that help you build credit or invest in your future, others are bad debts that can lead to financial instability. High-interest debts, like credit card debts, can quickly spiral out of control and result in a cycle of debt.

This level can be challenging to overcome since it takes time to pay off debts. I’m still paying off my student loans, and I just bought a car, so I’m right there with you. Managing debts effectively involves creating a debt repayment plan and sticking to it. Start by prioritizing your debts based on interest rates and balances, and pay off those with the highest interest rates first (using the Avalanche Method) or start with the lowest interest rate first (using the Snowball Method). Consider consolidating high-interest debts into a single loan with a lower interest rate. Avoid taking on new debts and use any extra funds to pay off your existing debts. Remember: paying toward your debts first before you spend your money!

Savings

Savings are an essential part of financial management. They help you build a safety net for emergencies, plan for the future, and achieve your financial goals. Again, I’d like to say that this belongs in level 2. It’s all about creating a safety net for yourself in case of unexpected circumstances such as medical conditions and job loss.

Aim to save at least 20% of your income each month (or start smaller like 5%) and consider setting up automatic transfers to a separate savings account to make saving easier. I’d recommend opening a high yield savings account and putting your money in. Normal banks barely give you anything for your interest (Compare 0.05% to a 3–4% interest). Make sure your saving earns interests on top of it!

Be specific toward your goals. Think about why you create the goal, set up the amount and timeframe so you can track your progress! Ask someone you trust to hold you accountable as you work toward your goal (I asked one of my closest friends to help me complete a 90-day challenge, and I saved roughly $4000!).

Conclusion

Managing expenses and debts can be overwhelming, but with the right tools and mindset, it’s possible to achieve financial stability. Start by creating a budget, tracking your expenses, and prioritizing your debts. Remember to save regularly and make smart financial decisions to avoid falling into debt traps.

As much as it’s hard to get past levels 1 and 2 in this finance game, once you overcome them, you’ll feel much better and can focus more on building wealth, which is level 3! Always have the goal of achieving financial freedom in mind. It requires effort and time, so you need to master these two levels first, and then you’ll conquer the rest! Until next time, my fellow money masters!

I created expense / debts / goals trackers template using Notion (the very ones you saw in this blog!). Grab them for free here: mchau4108.gumroad.com

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