5 Fundamental Principles of Personal Finance

If you can manage your personal finances well, you will be able to build a more independent financial stability. But many people do not know about these important financial principles, so they face many financial crises and live sadly.

Earlier in the article “4 Steps Strategy to Manage Your Income Wisely” we talked about how to achieve financial freedom by managing your income wisely.

Today, this article talks about 5 financial principles that you must know and follow in order to maintain your personal finances at a better level.

What is the benefit of knowing these financial principles?

The main advantage is that knowing these financial principles will give you a basic understanding of how to spend money. Most of the people do not know how to use the money once they get it.

People spend money at will without any meaning. They live a paycheck to paycheck lifestyle. They don’t even know what happened to the money after a week of getting the salary.

But someone who has some education in personal finance uses his salary more frugally. And such people are often free from extreme debt.

But most people today work not to live but to pay off their debts. There is no freedom in a life spent paying monthly loan installments.

Because you have entered into a legal agreement with another external party. You can even use your salary only after paying off the loan. But don’t you think it would be nice if you could buy the things you want without going into debt?

For that, you must have good personal financial management skills. The knowledge and attitudes needed to develop those skills are what you can add to your life through these personal financial principles.

5 Fundamental Principles of Personal Finance

01. Create at Least Two Streams of Income

There are several ways you can create two streams of income. You can do two jobs. That means another part-time job in addition to the main job.

Or you can start a business while working or invest money in an existing business. Or if you are a businessman, you can run two businesses.

Don’t depend on just one income. If you lose that source of income, where will the money come from? There is no other way you can get money.

That’s why you must focus on creating another source of income. The problem that most people have is that they don’t have this simple knowledge.

When they get a permanent secure job they depend on it and do not think of any other source of income. For this reason they have to become slaves in that job. So create at least two sources of income. More than two would be great.

02. Spend Less Than You Earn

Next, another thing that many people do is to get used to spending as much as or even more than their income. Some people borrow money in addition to their salary or income and spend it on consumption. It is a very foolish thing to do.

There are two ways you can do this. One is to keep expenses lower than your current income. Two is to create a level of income that exceeds expenses by multiplying your current income.

If you can go with the second method here, that’s great. Costs do not have to be reduced. It is better if the income can be increased by several times the current expenditure.

However, the thing you need to understand here is to always keep the expenses lower than the income. Try your best to keep expenses below a maximum of 75% of income.

03. Accumulate Assets Instead of Money

Most of the people accumulate money thinking that it is asset. But collecting money is not a very wise move. Also, its beneficial nature is less in the long run.

Money and assets are two things. The value of money depreciates over time due to inflation. If you save $100 today it will be worth $80 or less in 5 years (assuming 4% inflation). In that example, at the end of five years, your amount has decreased by 20%.

But imagine that if you buy an asset, its value will gradually increase over time. Assets like land and houses can be pointed out as the least risky and most durable asset.

If you buy land for $100,000 and after 5 years its value is $300,000, your investment has increased in value by 200%. If you wish, you can sell it and turn it into cash when the value increases.

When you have a lot of money, you can be rich. With lots of property, multiple sources of income, self-worth, social recognition and enough time, you can become wealthy.

But many people try to accumulate money. That is why they are constantly suffering from money problems.

04. Prepare for Emergencies

Saving money is important in case of urgent cash needs. You cannot sell your property at such a time. Assets like land and houses are assets with very low liquidity. That is, they cannot be instantly converted into cash.

You must have notes to cover emergency cash needs. Keep some money safe for that. You can maintain a separate bank account for it. You can withdraw the required amount of money from that account as soon as required.

This is not an amount to be built up all at once. You can gradually accumulate a large sum of money in this account over time.

05. Create a Retirement Plan

There is no point in thinking about retirement after the age of 55 to 60 years. You should think about this before you turn 40. But that doesn’t mean you have to retire in your 40s or build a retirement plan in your 30s.

But you should focus on retirement even from the age of 30. You need to think about how to make a plan to survive in your old age. You should think about it now.

You don’t have to create a retirement plan at age 30, just have some idea of it. Then you will be able to decide when you will retire, and you will also be able to plan a way to survive when you reach that age.