A good friend once told me, “Methods are many, principles are few. Methods are always changing, principles never do.” This is especially true in personal finance.
The Basic, Timeless Principles of Personal Finance 101
There are basic principles of financial management that I go back to again and again. I try to find different and unique ways to help people understand and apply these principles.
As this website continues to grow, I’ll introduce new (and old) methods of reinforcing and applying these basic financial principles.
Thousands, maybe millions, of books, blogs, magazines, and podcasts have been created about money ideas. These contain thousands of ideas about reaching your money goals.
Money Strategies might include things like cutting up credit cards, making a grocery list, dividend growth investing, or the envelope system. These can be great ideas to help you apply the principles, but they don’t work for everybody.
However, the good ones have about 5 or 6 principles in common. These principles are typically grouped into somewhere between 3 and 10 steps or ideas. If you can master these, you will do well with money. You will understand why some methods work and some don’t. Here are the principles:
Principle #1: Debt is Generally Not Good
Proverbs 22:7 says, “The rich rules over the poor, and the borrower is the slave of the lender.” Debt is pretty much the opposite of financial freedom; it is financial slavery.
Get out of debt and stay out of debt, especially high interest debt. Debt costs you money. Money going towards debt is money you can’t save, you can’t spend, you can’t invest, and you certainly can’t give away.
The higher the interest rate, the more it costs you. Some debt is super bad; other debt is maybe not as bad. How bad it is depends on what it’s being used for, the interest rate, and the amount. For example a low interest mortgage that you can afford might be wise, but high interest rate credit card debt that you can’t afford is never wise.
Generally though, the only time you should celebrate debt is when you get out of it.
Principle #2: Make a Budget
A budget is where your financial dreams and life values meet your economic reality. It can be both forward looking to keep you from foolish spending and backwards looking to hold you accountable to your plan.
This is your map for determining what priorities you want to spend money on and how to stay out of debt.
A simple budget starts with knowing how much money you bring in and deciding where you want it to go.
Track your spending. Understand where your money is going. Make a budget, and do your best to follow it. If you fail to plan, you are planning to fail.
Principle #3: Spend Less Than You Earn
Budgeting is great, but sometimes we need a little less talk and a lot more action. Thank you Toby Keith for that great line. Spending less than you earn speaks for itself, but if you are going to grow your net worth and pursue financial freedom, you need to spend less than you earn consistently.
There will be months where you have emergencies or take a trip that you’ve been planning for years that will cost more than you earned that week or month or maybe even year. However, on the whole, you should be spending less than you earn.
Unless you are already wealthy, you need an income. The more you earn, the more money you have to spend, save, invest, or give. Inflation causes your expenses to go up every year, so hopefully your income can keep up or grow faster than inflation.
There’s nothing wrong with lower wage jobs. They are a great way to gain experience and for semi-retired folks just looking to pass the time, but you will have a hard time progressing towards financial independence without growing your income over your working years.
Principle #4: Save
Saving is your best defense. Build at least an emergency fund and preferably a rainy day fund, and it doesn’t hurt to have a cloudy day fund either. You may want to build other fun funds for things like vacations, home repairs, down payments, Christmas presents, etc. if that is helpful.
An adequate savings is intended to protect you from making foolish financial decisions. It may also be wise to save some money to invest if the market presents a golden investment opportunity.
I recommend saving 3-6 months of expenses in an emergency fund, but more doesn’t hurt. You never know what’s going to happen, and you don’t want a financial setback to become a financial disaster.
Principle #5: Invest and Take Advantage of Compound Interest
It’s time for your money to quit being lazy and get a job. It needs to start working for you. Investing is how you make money work for you. You put money in with the expectation of receiving more in the future.
The more time you have, the better. Compound interest allows your money to go crazy growing off itself once you reach a certain point. See the Rule of 72 for more details on the power of compounding.
If the thought of investing overwhelms you, start with low cost index funds or ask somebody who knows about investing. I’d love to help you get started. However, like all of these principles, there are many successful methods to investing.
Principle #6 (Optional, but wise): Give Money Away
If I’m focusing on “Christian” Personal Finance, I would definitely include giving as a core principle. I do think it’s good and best and healthy, but I’m not going to say it will make you have more money.
If I’m just looking for the fastest way to become a millionaire, giving money away is probably not the fastest way. I really don’t like the health and wealth gospel. I do think God blesses our giving, but that doesn’t mean we necessarily get a financial return.
Money Methods vs Financial Principles
Much of what you hear as financial advice should be categorized as a money method. A method is a strategy or answers the question, “How do I apply this principle?”It is really good to have methods, but it is important to understand the principles.
Understanding the principles will help you filter out the good advice from the bad and determine what works best for your financial plan. Principles allow us to more accurately discern whether a financial strategy is brilliant, simply different, or foolish.
The principles explain the why behind the strategies. Understanding the why will help you stick to the strategies when life doesn’t go as planned.
Throughout Wise Money Home, I present methods or ideas for growing towards financial independence centered around these core values. I hope we can be your home for applying these principles and figuring out which strategies work best for your situation.