Published in: Banks | April 8, 2019

The 5 Principles of Personal Finance Everyone Must Follow

By:  Lyle Daly

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A few important principles are all you need to use your money wisely.

Grandmother teaching boy how to save coins in a jar.

Image source: Getty Images.

Personal finance can be a complex subject, and it's easy to get overwhelmed with all the information that's out there. You could spend hours reading about how to handle money, with little to show for it after.

But money matters don't have to be so complicated. There are a few key principles that can make or break you, and if you want to build a strong financial future, then you need to know them by heart.

1. Spend less than you earn

This first principle is by far the most important. The only way you can be successful is by having more income than expenses every month.

By spending less than you earn, you can put money away for the future instead of living paycheck to paycheck or sinking deeper into debt because you can't pay your bills.

One popular piece of advice is that you should save at least 20% of your income in a high-quality bank account. That's a smart goal for most people, but if you can save even more, you absolutely should.

2. Maximize your income

Although it doesn't get talked about enough in the world of personal finance, increasing your income is the best way to save more money, rather than pinching pennies.

The amount you can save by reducing your spending is limited. Sure, you can make cuts here and there, but that doesn't work forever. Eventually, you'll reach the point where there are no more cuts left to make.

Instead of trying to budget your way to being rich, you're much better off looking for ways to make more money. Negotiating a raise, finding a higher-paying job, freelancing, or starting a business on the side are all ways you can bring more money in.

3. Plan for emergencies

Emergencies are a fact of life. If you're not ready for them, they can cost you a lot of money. There are two ways to prepare for emergency expenses:

  • Putting money into an emergency fund
  • Making sure you have all your necessary insurance coverages

Your emergency fund is the money you'll use for any unexpected bills that come your way. Ideally, you should have three to six months of living expenses in your emergency fund. It takes some time to save that much, but any money you save is better than nothing. Get your emergency fund started by opening a high-interest savings account and depositing whatever you can manage every month.

People often skimp on insurance, only to wish they hadn't when they get hit with a huge bill later. At a minimum, you should have:

  • Health insurance
  • Renter's or homeowner's insurance
  • Auto insurance

4. Build your credit

Like it or not, your credit score can have a significant impact on your everyday life. If you ever want to get one of the top credit cards or borrow money at a low interest rate, then your credit score will play a key role. That's not all it does, though: Your credit can also determine your car insurance rates, whether you pay a deposit when setting up utilities, and even whether you get hired for certain jobs.

The good news is that, despite the confusion about credit scores, it's not hard to build yours. You'll need a credit card that you use and pay off every month, as this helps you build a record of responsible borrowing. If you've had trouble qualifying for a credit card, secured credit cards are a good place to start.

Just make sure you're paying your bills by the due date and not using too much of your available credit. Those are the building blocks of an excellent credit score.

5. Save for retirement

Retirement, a.k.a. that thing most people start thinking about much later than they should. The sooner you start contributing to a retirement account, the better off you'll be.

It's imperative that you start saving for retirement early and take advantage of the tax breaks offered through 401(k)s and individual retirement accounts (IRAs). You'll give your money plenty of time to accumulate through compound interest, which is the smartest way to build wealth.

What's important here is that you save something every month for retirement. Whether it's $50, $100, or over $1,000, later on you'll appreciate that you got into the habit of saving. So long as you invest the money responsibly, your contributions will grow many times over throughout your career.

The only financial advice you need

It's not necessary to weigh yourself down with tons of financial tips. The personal finance principles described above can help you no matter what you do or where you are in life. Follow them religiously, and not only will you end up financially stable, but you'll also be able to grow your wealth for the future.

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