12 financial principles you should know
When asked if they would like to handle their personal finances more skillfully, nearly everyone answers a resounding “yes!” Being financially competent begins with understanding and applying some basic financial principles. It doesn’t matter your age or your income…knowing and living by these 12 principles will make you a better manager of your money:
1. Map your financial future. Take time to list your financial goals, along with a realistic plan for achieving them. You can eventually reach the places you want to go without a roadmap, but seldom without getting lost first.
2. Pay yourself first. Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.
3. Start saving young (and know that you’re never too old). Recognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save. The sooner you start saving, the more funds you'll be able to amass over time.
4. High return = high risk. Recognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the interest rate offered to you as the investor, the higher the risk of losing some—or all—of the money you invest. Diversification of assets is the best protection against risk.
5. Money doubles by the "Rule of 72". To determine how long it will take your money to double, divide the interest rate into 72. For example, an account earning 6% interest will double in twelve years (72 divided by 6 equals 12).
6. Budget your money. Create an annual budget broken down into monthly detail to identify expected income and expenses, including savings. This will serve as a guide to help you live within your means and prepare for the future.
7. Know your take-home pay. Before committing to significant expenditures, calculate how much income is likely to be available for you. Net income, after all mandatory deductions, is far more appropriate to use when considering new purchases and expenses than gross income before deductions.
8. Don't expect something for nothing. Be leery of advertisements, sales people, or other financial sales pitches promising anything free. Like non-financial opportunities, if it sounds too good to be true, it probably is.
9. Your credit past is your credit future. Be aware that credit bureaus maintain credit reports, which record borrowers' histories of repaying loans and credit. Negative information in credit reports will adversely affect your ability to borrow at a later point.
10. Compare interest rates. Obtain rate information from multiple financial services firms to get the best value for your money. Remember, these companies compete for your business!
11. Don't borrow what you can't repay. Be a responsible borrower who repays as promised and proves you are worthy of getting credit in the future. Before you borrow, compare your total payment obligations with the net income that you will have available to make these payments.
12. Stay insured. Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan.
1. Map your financial future. Take time to list your financial goals, along with a realistic plan for achieving them. You can eventually reach the places you want to go without a roadmap, but seldom without getting lost first.
2. Pay yourself first. Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.
3. Start saving young (and know that you’re never too old). Recognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save. The sooner you start saving, the more funds you'll be able to amass over time.
4. High return = high risk. Recognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the interest rate offered to you as the investor, the higher the risk of losing some—or all—of the money you invest. Diversification of assets is the best protection against risk.
5. Money doubles by the "Rule of 72". To determine how long it will take your money to double, divide the interest rate into 72. For example, an account earning 6% interest will double in twelve years (72 divided by 6 equals 12).
6. Budget your money. Create an annual budget broken down into monthly detail to identify expected income and expenses, including savings. This will serve as a guide to help you live within your means and prepare for the future.
7. Know your take-home pay. Before committing to significant expenditures, calculate how much income is likely to be available for you. Net income, after all mandatory deductions, is far more appropriate to use when considering new purchases and expenses than gross income before deductions.
8. Don't expect something for nothing. Be leery of advertisements, sales people, or other financial sales pitches promising anything free. Like non-financial opportunities, if it sounds too good to be true, it probably is.
9. Your credit past is your credit future. Be aware that credit bureaus maintain credit reports, which record borrowers' histories of repaying loans and credit. Negative information in credit reports will adversely affect your ability to borrow at a later point.
10. Compare interest rates. Obtain rate information from multiple financial services firms to get the best value for your money. Remember, these companies compete for your business!
11. Don't borrow what you can't repay. Be a responsible borrower who repays as promised and proves you are worthy of getting credit in the future. Before you borrow, compare your total payment obligations with the net income that you will have available to make these payments.
12. Stay insured. Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan.