Basic Principles of Personal Finance

unsplash-halfdomeYou can find plenty of personal finance guidelines online from tons of experts. If you start reading thru some of them or talking with a bunch of experts, you will hear a lot of the same principles repeated over and over. This is not something where I’m going to shed a lot of new insight, but a personal finance blog without a post about the basic principles, would just seem like it is missing something. So I’ve distilled down a set of principles that resonate with me. These are the foundation for my money habits and the mantras I say in my head to keep myself grounded (financially). I encourage you to do the same.
  1. Live within your means. Spend less than you earn. Personally, I like to say, “be cheap with yourself, but generous with others.”
  2. Always think of ways to make more money. This is the counterpoint to #1. In addition to thinking about how much you spend (expenses), I like to also think about new ways to to bring in more income (revenue).
  3. Stay out of “bad” debt.  I like how Robert Kiyosaki, author of  “Rich Dad, Poor Dad”, explains the difference between “bad” debt and “good” debt. Bad debt is debt for your personal spending, like credit cards, car loans, etc. “Good” debt is used to make money for you (e.g., a mortgage on an investment property, or student loans for a college degree, thereby increasing your earning potential). And pay off your “bad” debt as soon as possible (the worst debt first – credit cards).
  4. Pay yourself first. Make sure you put money into a savings or investment account every month first before any of your other expenses. Best way is to have automatic deductions from your paycheck or automotic transfers to your savings account.
  5. Make your money work for you. You work hard for your money. Now you need to make your money work hard for you. Invested wisely (stocks, real estate, etc.), your money can generate passive income for you (make money “while you sleep”).
  6. Save early so time can work for you. Your money will generate a return on the money you invest. And every year, it will continue to generate a return on not only your original investment, but on the returns you earned during the prior years. This is called the “power of compounding”, which I personally think this is the single most important financial concept (“Power of Compounding – Doubling Cycles” is a blog post I have discussing the subject in more detail). The longer (time) you have your money compounding, the greater the wealth you are amassing. So let time be your friend and save early and often.
  7. Invest in yourself. Continually educate yourself. You are your biggest asset.
  8. Use taxes to your advantage. Contribute as much as you can to all of the tax-advantaged savings plans (IRAs, 401Ks, 529s, etc.). Longer-term holdings have lower capital gains rates. And so on. Consult your tax accountant about the tax consequences for any of the major financial decisions you are contemplating.
  9. Limit your “big” risks. I make distinction between “all” risk and “big” risk. I think you can never eliminate all risk. Worse yet, if you try to eliminate all risk, you give up your potential upside. “Big” risks are catastrophic events that can wipe you out (e.g., major medical event, lawsuits, major accidents, etc.). Maintain insurance to cover these major event risks. Avoid trades/investments that expose you to limitless risk.
  10. Always have a goal in mind. Just like with anything else, you need a goal to know where you are going.

There are many other personal finance lists and examples you can find online. Here are a few:

They all have good lessons for us to live by for our personal finances. So find a set of principles that works with you and start building your financial foundation.

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