7 Simple Personal Finance Principles
I like the number seven. Ten seems like a lot of rules principles, and five may not seem like enough. Maybe I’m a bit bias because my birthday is on the seventh day of November. 🙂
I never thought I would write one of those articles about the number of ways to do this or that. But I find myself reading these types of articles. They are simply easy to read and follow, and somehow stick to me better because they are organized, plainly laid out and incorporate numbers. So I thought if I read them so much, I should write one too.
So without further delay, here are my own seven principles for Personal Finance. They are also in the order of importance, that is, each one is more critical than the next.
Spend Less Than You Earn
This is a key principle. No matter how much you earn, you won’t become financially successful if you spend more than what you bring in.
It’s simple math; if you bring in $100,000 per year and are consistently spending $120,000, you’ll always be in the red. Either you need to find a way to earn more to fund your lifestyle, or make changes to your lifestyle to be able to save some of the $100,000.
Invest Consistently
Once you start setting aside some money (using principle 1), it’s important to not just keep it aside. In order words, make your money earn you more money, through investments. There are so many things you can invest in: stocks, stock funds, derivatives, real-estate, real-estate investment trusts, bitcoin, and other forms of businesses.
Wherever you decide to invest, make sure you gain knowledge of that investment subject. For example, I personally don’t have enough knowledge of derivative investments, but I do know they carry more risk than I am willing to take. So derivatives are not my preferred investment choice. Additionally, I realize that real estate as an investment could potentially provide good gains, but I also realize they take more hands-on time and a larger cash investment (both of which I don’t have).
Once you gain enough knowledge, you’ll be comfortable enough to deploy funds into the investment consistently. Consistently investing could mean every month and can be easy through automating your investments. For example, the dividends you earn from a brokerage account can be set-up to automatically purchase more shares once you receive dividend income into your account.
Don’t Spend For The Sake of Spending/Boredom
Some people will go to the mall without a specific reason; “let’s go shopping”, they’ll say. What are you shopping for? I don’t know, maybe I’ll see something I like. Unless you’re super-wealthy, I don’t recommend doing this. Spending purely for the sake of spending can lead to impulse purchases and regret of buying things you don’t really need or will use for a long period of time.
Usually, when I am looking to buy something (especially a big purchase), I hold off a couple of weeks. I come back to the idea and have a checklist to try to sell the purchase to myself first. If I can do that, I’ll feel confident that it’s the right purchase to make and will add value to my life. This method has worked as it has removed the feeling of buyer’s remorse. Plus it sucks taking time out of your schedule to go to return or exchange something.
Don’t Overthink Investments
If you keep analyzing what investments to purchase, you’ll never be brave enough to buy them. In other words, over analyzing can lead to analysis paralysis, – a situation where after all the time and effort, a decision is not reached. Unless you’re just putting money into a savings account, CD or bonds (all of which pay little returns), most other investments carry some form of risk.
And if you’re still having trouble deciding, maybe an index fund that invests in the entire stock market is the right decision for you. One example is Vanguard’s Total Stock Market ETF – VTI which has over 3,000 stocks in it so you own a tiny piece of the whole market. Please note that I am not specifically recommending this fund; just illustrating a point to aide in decision-making when it comes to deciding on an investment choice.
Never Hold Credit Card Debt
Sometimes life happens and it may be hard to pay for large unexpected expenses with cash. This is where I will refer back to principle 1, earn more than you spend. The excess can go towards an emergency fund to pay for unexpected things. The result is you won’t have to charge your credit card and possibly pay extra money towards interest.
And if you do hold lots of credit card debt, I would say this principle should probably be at the top of your specific financial situation. The goal of which should be to pay off your credit card debt as fast as possible and move onto the following principles.
Set New Goals For Income, Saving and Investing
As you income changes (hopefully at an increasing rate), so should your goals for saving and investing. It’s important to not allow lifestyle inflation or “keeping up with the Jones’s”, however they are pressuring you to buy things you don’t really need to. If you have already allocated expenses to your incremental increase in income, there is no incremental increase in savings and investing. Besides, setting new goals can help you achieve an overarching goal (e.g., retire early or become a millionaire) faster.
Continue to Learn About New Concepts
As with so many other topics, things continue to evolve around the personal finance landscape as well. A few examples include:
- Mobile banking
- Mobile investing
- Mobile personal finance apps
- Commission-free trading
- Crowd real estate investing
- Credit card reward hacking
Maybe only some of these can help your specific personal finance situation. It’s important to continue to learn about new ideas or concepts so you can optimize your finances. The best part all you really need to pay for is an internet connection (or maybe not even that if you go to the library) because so much great quality material is free.
I’m so thankful to have access to such great resources as they’ve led me to make better personal finance decisions.
Note: This article originally appeared at Simple Money Man.
Category: Personal Finance
