12 Principles of Personal Finance
We support New Hampshire's Jump$tart Coalition. The Coalition is a statewide, all volunteer, non-profit association dedicated to improving the personal financial literacy of children in the Granite State. They devised this list of 12 principles of personal finance you should know, and share with your growing children. Many graduate from high school without having any education regarding dealing with their finances once they enter college or go out on their own after graduation. Discuss these with your children and make sure they understand. It's very important for them to get a good start.
1. Know your take home pay.
Before committing to significant expenditures, estimate how much income is likely to be available for you.
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 at young age.
Recognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save.
4. Compare interest rates.
Obtain rate information from multiple financial services firms to get the best value for your money.
5. Don't borrow what you can't repay.
Be a responsible borrower who repays as promised, showing you are worthy of getting credit in the future.
6. Budget your money.
An annual budget to identify expected income and expenses, including savings, will help you live within your income.
7. Money doubles by the "Rule of 72".
To determine how many years it will take your money to double, divide the interest rate into 72.
8. High returns equal high risks.
Recognize that no one will pay you high interest rates on a sure thing. Diversification of assets is the best protection against risk.
9. Don't expect something for nothing.
If it sounds too good to be true, it probably is.
10. Map your financial future.
Take time to list your financial goals, along with a realistic plan for achieving them.
11. Your credit past is your credit future.
Be aware that credit bureaus maintain credit reports, which record borrowers' histories of repaying loans. Negative information in credit reports can affect your ability to borrow at a later point.
12. Stay insured.
Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident.
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FAQs
Rules of Personal Finance, #1: Spend Less Than You Make
It's that simple. Know how much money comes into your accounts each month, and manage how much goes out so that you do not spend more than what you earn. In most cases, this is the very first step to take toward building wealth.
What is the #1 rule of personal finance? ›
Rules of Personal Finance, #1: Spend Less Than You Make
It's that simple. Know how much money comes into your accounts each month, and manage how much goes out so that you do not spend more than what you earn. In most cases, this is the very first step to take toward building wealth.
What are the basic principles of personal finance? ›
Personal finance includes budgeting, saving for retirement, investing as per your risk-taking ability, paying off debt and improving your credit score. By leveraging the principles of personal finance, you can make informed decisions and boost your financial wellness.
What are the 5 points of personal finance? ›
Personal finance basics include budgeting, saving, investing, managing debt, and understanding credit. Budgeting involves tracking income and expenses, setting financial goals, and making informed spending decisions.
What are the essential questions of personal finance? ›
Essential Questions:
- How do financial goals vary across a person's lifetime?
- In what ways does money management impact reaching financial goals?
- What constitutes sound financial decision making?
- How does organized record keeping impact finances?
- What factors impact a person's spending plan?
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
What is the 80% rule personal finance? ›
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.
What is the 10 rule in personal finance? ›
The 10% rule is a savings tip that suggests you set aside 10% of your gross monthly income for retirement or emergencies. If you still need to start a savings account, this is a great way to build up your savings. You should create a monthly budget before starting your savings journey.
How to start personal finances? ›
9 steps in financial planning
- Set financial goals.
- Track your money.
- Budget for emergencies.
- Tackle high-interest debt.
- Plan for retirement.
- Optimize your finances with tax planning.
- Invest to build your future goals.
- Grow your financial well-being.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
This article will discuss the six essential types of financial planning that you should be able to provide, including cash flow planning, insurance planning, retirement planning, tax planning, investment planning, and estate planning.
What are the 5 financial literacy questions? ›
Financial Literacy Test
- How much money should you put into savings every month? ...
- How much of your income should be used on monthly credit card payments? ...
- What's the maximum debt-to-income ratio a person can have and still qualify for a mortgage? ...
- How often can you check your credit report for free?
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
What are the three main areas or questions of finance? ›
Corporate finance has three main areas of concern: capital budgeting, capital structure, and working capital. Capital budgeting deals with how the organization will invest in itself. Some of the long term investment which an organization can take include investing in stocks and index funds.
What is Rule 1 investing principles? ›
Warren Buffett and his mentor, Ben Graham, championed Rule #1 for one fundamental reason: minimizing loss. By minimizing losses, even in subpar investments, you increase your chances of finding winning investments over time.
What is the 1 3 rule in personal finance? ›
The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.
What is rule number 1 of paying yourself first? ›
Generally, “pay yourself first” means what it says—set aside money for savings before paying bills and making other purchases. But it's still important to keep up with debt obligations. Automatic transfers can make it easier to pay yourself first.
What is the rule of 3 personal finance? ›
The money rule of three is a guideline for financial stability. It advises dividing your income into three parts: expenses, savings and investments. This division helps in maintaining financial discipline, ensuring savings and investment for future security while covering current expenses.
