13 Lost Principles of Personal Finance
When it comes to money, we all want more of it, but getting there takes a lot of diligence and practice. We don’t become financial gurus overnight, but with a little bit of research and work, we can make our money work hard and stretch our dollars further.
Money doesn’t have to be this mystical thing that most of us don’t understand. There are some very basic principles of finance that have been lost over the years and when we reclaim them, we can really start watching our savings add up. So, without further adieu:
- Spend less than you earn. You can either do this by decreasing your spending or upping your earning potential. Don’t see a raise in the near future? Look for odd jobs and extra streams of income to pick up on the side.
- Set up an emergency fund. Before anything else, you want to make sure you can cover your basic bills if you suddenly found yourself unemployed. Experts recommend an emergency fund of anywhere from 3-6 months of necessary expenses.
- Reduce debt. There are two ways to start tackling debt. You can start with the smaller amounts, like credit cards, and then work on bigger amounts, such as student loans, or focus on debts with a higher interest accrual before whittling down those that accrue at a lower rate.
- Save for retirement. Once you have an emergency fund and your debt reduced, look to the future. If your employer has 401k matching, be sure to at least meet it. When finances allow, max out your 401k, saving as much as is annually allowed by the IRS.
- Establish a budget. Once the main systems of your finances are in order, don’t go one step further without a budget in place. Always remember rule 1: spend less than you earn. If your expenses are more than your income, you need to reevaluate.
- Know the value of your dollar. When spending money, it’s good to know how much work you have to do in order to bring that item home (and don’t forget to factor in taxes and health insurance fees). Knowing a shirt would take you two hours to work for might just be the key to keep your spending habits in check.
- Memorize the spending/saving golden rule. Per Warren Buffet, “do not save what is left after spending, but spend what is left after saving.” Always save first!
- Use the 50-30-20 rule. From your take home pay, 50% should go toward fixed expenses, 30% for discretionary expenditure like dining out and vacations, and 20% toward financial goals, like retirement and college funds (we also strongly advocate for a monthly allotment to go toward giving).
- Focus on retirement as quickly as possible. The sooner you start, the more financially secure you’ll be when the time comes.
- Know the difference between needs and wants. Don’t ever overspend on a want and only make exceptions for absolute necessities. Understanding the difference is key.
- Invest wisely. We could go into a lengthy debate about investing your money, but once you’ve saved for retirement, have whittled down your debt, and secured college funds, you can start playing around with the idea of investing. Don’t make drastic decisions. Think it through. Do your research, and then proceed.
- Follow this rule of thumb from 1940: “Use it up. Wear it out. Make it do or do without.”
- Accept your mistakes. Know ahead of time that you’ll make mistakes. You’ll give into the urge to splurge a few times before understanding the true difference between needs and wants. You won’t make your money work harder for you. You’ll spend more than you make one month. Accept the failure, learn from it, and move on.
These lost principles of personal finance are what got many of our grandparents through terribly difficult financial times and they can do the same for you and me. With practice and patience, we can learn to embrace these keys and really watch our finishes flourish.