Basic Principles of Personal Finance
Most personal finance advice boils down to three main rules:
- Spend less than you earn
One of the most important lessons my dad taught me was to “play within my ability.” While it seems like disheartening advice at first, think of it this way: a successful musician sounds more accomplished playing a simple piece of music well, rather than a difficult piece of music poorly. It’s the same with personal finance: playing within your ability is equivalent to spending within your means. Your success will come from spending less money than what you earn. The fastest way to accumulate bad debt is to spend money you don’t have. When that happens, you find yourself paying back money for things you bought and enjoyed months, sometimes years ago!
For example: If you only have $50 and you want to buy a $100 pair of jeans, maybe take a minute before you borrow $50 from your friend that you will have to pay back later, taking away from your future income.
- Prepare for the unexpected
Some of you might remember a time when your parent or guardian lost a job, maybe someone in your family had a medical emergency that cost a lot of money, or maybe you know someone who lost their home and all of their possessions to a disaster. Part of financial planning and personal finance is to prepare for the unexpected. The great thing is that you don’t have to go out and create new and innovative ways to do this (if you don’t want to)!
The tools to help you with the unexpected already exist; it’s just a matter of learning what they are, choosing the ones that you are the most comfortable with, and then being diligent in sticking to your plan. It’s also very important that when the unexpected happens—and it will at some point in your life—you have practiced keeping emotion out of your purchasing habits. Try to avoid buying those crazy expensive new shoes when you are feeling blue. Emotions and stress can cloud your judgment when you need to make a decision, especially a financial decision. We’ll explore this more later.
- Make your money work for you
You’re going to learn a lot about the purchasing power of your money in this book. Remember, money is a tool to get you where you want to be. A tool is something that makes a task easier, and we should think of money that way as well. Once you’ve mastered the two previously mentioned strategies, there are almost endless strategies and ways to grow your money that don’t require you to do anything except make a decision. Using money in this way can be a goal in your financial plan, a part of your budget, or even a hobby—and when done properly, it will provide you with income once you’re no longer able to earn it yourself!