The 5 Pillars of Personal Finance, Pillar #1: Earn
Personal finance is vast and can be confusing, especially for those just starting their financial lives or those new to the U.S. personal finance system. But the whole subject can be distilled down to 5 fundamental pillars:
Earn
Save and invest
Protect
Spend
Borrow
Once you have an understanding of the 5 pillars of personal finance, you will have a solid base of knowledge that will give you a solid foundation for your financial life. That's what this series is about. We will break down each of the 5 pillars of personal finance individually.
Today we begin with the first pillar, earn.
Salary
For most of us, the bulk of our income will come from our jobs. And our jobs are how we spend a big chunk of our lives, so we want to get the most money possible. That doesn't necessarily mean you must have a college degree or go into fields that traditionally pay well.
It just means you must make the most of your chosen job or career.
Make sure your salary is what it should be. Before you accept a job offer or ask for a raise, check websites that offer salary details for various jobs depending on the location, level of education, and experience. This information will allow you to better negotiate with a potential or current employer when asking for a raise.
Speaking of job offers, if you want to make more money, switch jobs. Those who move jobs typically get a bigger bump in pay than those who stay put. Even if you're pretty happy in your current job, keep your eye out for new opportunities. Always keep your resume updated, network in person and online within your field, and occasionally apply for jobs and go on interviews; it keeps your interview skills sharp.
Keep up to date with new advances in your industry, including new skills that can help advance your career. Basically, do more than go in day after day, year after year, to the same job. It's a big world out there.
Benefits
Salary isn't everything when it comes to money in your pocket; consider the benefits offered too. Healthcare is costly in the U.S., so a job that provides health insurance with a lower salary can be better than a job offering a higher salary and no insurance.
Paid time off is another consideration. Too many employees can find themselves in real financial trouble if they need to take time off for an injury, an illness, or personal reasons and don't get paid for the time they miss.
We often hear there is no such thing as free money, but there is an exception; 401(k) matching. A 401(k) is an employer-sponsored retirement account that some employers offer their employees as a benefit. If an employee opts in, money is taken from each paycheck and automatically invested, typically in a mutual fund. This is an excellent way to PYF (pay yourself first).
Some employers offer 401(k) matching. If the employee contributes to their 401(k), the employer matches the contribution up to a certain amount, free money!
For example, the employer matches $0.50 for each $1 the employee contributes up to 6% of their salary. If the salary is $50,000 per year, 6% of the salary is $3,000. If the employee contributes that amount, the employer contributes $1,500 as a match.
But of course, not everything is about money; quality of life and work-life balance matters too. If Job A is offering the big bucks but less vacation time or no option to work remotely, or less flexibility in general compared to Job B, don't jump at the money too hastily. A job you hate that negatively impacts your quality of life is often not worth the big salary.
Side income
Everyone is expendable when it comes to a job. Nearly every state in the U.S. is an at-will state meaning an employer can fire you for any reason (unless it's illegal to do so based on something like race), no reason, no warning, and without having to prove just cause. Almost 74% of employees in the U.S. are at-will employees.
Even if you're in a job exempted from at-will laws, you could still lose your job through no fault of your own; the company could go under, be wiped out in a disaster, or be shut down for some kind of local, state, or federal regulation.
Or maybe one day, you just get fed up and quit without having another job lined up. Whatever the reason, the point is your primary source of income could cease one day. That's why everyone needs a second source of income.
It doesn't have to be a lot of income, although, over time, it can become that. And it can come from anywhere. Two great places to start are your hobbies and your career. Do you have a hobby you can monetize? Can you take the skills from your job and use them to freelance or consult?
There are gig economy side jobs like Uber, TaskRabbit, and Instacart. And then there are old-fashioned side jobs like babysitting, pet care, lawn work, serving, and retail.
Any extra money you bring in can help you reach financial goals or help you in a time of unemployment.
Passive income
There are only so many hours in the day, and we can't be actively working during all of them. So a key component of the Earn pillar of personal finance is passive income. Passive income is money earned that is largely divorced from your time or effort. One example is investing, which will be discussed in our next article.
Other passive income sources include rental property, affiliate marketing, online courses, teacher's plans, books, and cash-back credit cards. Cash-back credit cards won't make anyone wealthy, but they can make everyday purchases a little less expensive. You need a healthy credit score for approval, and if you're not quite there, Upwardli can help!
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In our next article, we'll discuss the second pillar of personal finance, save and invest.