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12 Principles of Personal Finance

12 Principles of Personal Finance

One way to know if you want to follow a blog, listen to a talk-show, or even become someone's friend, is to find out if the principles you want to live by match up with the other person. So, here is Vertex42's list of personal finance principles.

Update 10/27/2015: I've added the Principle of Sufficiency to this list, making it 13 principles now.

The Principle of Giving

You don't have to be a religious person to know that giving to others and serving others is considered a good trait, and selfishness is considered a bad trait. Selfishness is natural and instinctive, but it's also childish and generally leads to unhappiness (think of the Grinch and Mr. Scrooge).

We are taught as children to share, and that principle of giving should remain with us into our adult years. Giving has a positive effect on your character. It makes you a better person. It makes you happier.

I would highly recommend that your charitable giving be defined as a percentage of your income. Giving to others has a stronger positive effect when the gift is somewhat difficult for you. Therefore, as your income increases over time, so should the amount that you give. Choosing a percentage as your goal will help ensure that. This principle is thousands of years old - the term "tithing" is defined as a tenth (10%).

The Principle of Saving

The Piggy Bank is the perfect symbol for personal finance in your early years. Not buying that new toy until you've saved up enough money is a lesson that everyone should learn. But, does this lesson stick? The federal government deficit and the amount of consumer debt in the U.S. says "no."

You've probably heard "patience is a virtue." This is a vital lesson in finance as well as in life. The desire for immediate gratification, or impatience, is another natural and childish trait. When left to run a muck, this trait leads to an unnecessarily expensive lifestyle and uncontrolled debt. The use of credit cards, combined with the constant temptations and enticements of advertising and comparing yourself to others, provides the perfect vehicle for immediate gratification.

Most of us know that we should save money, but actually doing it is a different story. It takes self-restraint, determination, and strength-of-mind to resist "keeping up with the Joneses" or buying the latest iGadget. That is probably why so many personal finance books and articles are mostly motivational. People need it.

Tip: A person should define specific savings goals based on their core set of values, needs, and desires. Don't save money just for the sake of saving. Allocate savings to specific goals.

Tip for parents: To teach the principle of saving, the allowance given to a child must be less than what they will need to buy what they want.

The Principle of Sufficiency and Gratitude

The opposite of sufficient is insufficient, or not enough. We are pressured every day through media, advertisements, and social interactions to think that we don't have enough and need more. More money, better cars, more fun, a higher paying job, whatever. No matter how much you have, somebody will have more, so the quest for more will never end.

Instead, be grateful for what you already have (talents, family, skills, possessions, health). The principle of sufficiency is not about giving up or not pursuing dreams or not developing your talents and skills. It is about finding ways to appreciate and get more fulfillment out of what you already have.

A daily dose of gratitude for what you already have can have a powerful positive effect on your attitude about money and help you develop and maintain healthy financial habits.

The Principle of Working

The principle of working is something that a parent should begin to teach kids at a very early age, but the teen years are where we first start to realize why work is important. Instead of just doing chores because we have to or because we won't get dessert if we don't, we realize that earning our own money leads to greater independence.

As teens, we learn that work leads to money, and money allows us to make more choices. Therefore, work leads to financial freedom. As adults, it might help to keep in mind that this is still true. We work to try to remain free - free to choose the life we want to live. Poor financial decisions may lead us to be slaves to debt, but work still provides the path to freedom.

The principle of work isn't just about earning money, though. It teaches responsibility. Something achieved through hard work is more appreciated - more valued. Even without payment, work leads to a feeling of accomplishment. The feeling of accomplishment is so real and positive, it can become addictive.

The Principle of Researching

The principle of researching has to do with increasing your knowledge in order to make better financial decisions. Some of the things that can be learned at an early age are:

  • how to figure out what product really is the best one instead of what is just marketed the best
  • how to find the best deals and best prices
  • how to buy a reliable used car

As an adult, doing your research is vital because the financial decisions you make are so much larger and have a huge effect on you and your family's lifestyle. Buying a home, deciding on what insurance to buy, and making investment decisions are just a few things that require you to do your research to avoid bad decisions.

The Principle of Prioritizing

How much do you save for the car vs. save for college? Should you buy that class ring or save the money to help buy a laptop for school?

Learning to prioritize is an essential part of good money management. You should try to align your financial priorities with your core values. You will need to set and adjust your priorities as you pass through different phases of life (child, student, single adult, married adult, parent, empty-nester, retiree).

Most people don't have an unlimited guaranteed income, so you should make conscious decisions about what to with your money. Prioritizing your spending will allow you to decide what type of lifestyle you want and where you can cut back if you are struggling to make ends meet. Prioritizing your saving will allow you to better handle future curve balls that life throws at you.

Some of the important things to consider are:

  • Creating an emergency fund
  • Saving for college
  • Saving for future replacement of vehicles, appliances, etc.
  • Purchasing a home vs. renting
  • Saving for retirement
  • Getting out of debt
  • Ensuring your parents are taken care of in their later years

The Principle of Tracking and Budgeting

Living within your means (meaning that your expenses are less than your income) is a key to avoiding the debt spiral and achieving financial freedom. Tracking and budgeting are simple tools you can use to help keep your spending under control.

Tracking your cash flow (money coming in and going out) on a regular basis is a very important money management habit. Tools for tracking your money may include a small notepad, a mobile app (e.g. Mint), a spreadsheet, and software (e.g. Quicken) designed to download transactions from bank and credit card accounts. Knowing WHERE your money is going and HOW MUCH you have on hand is the first step in money management, so you need to track it.

The second step in money management is to create a plan for where your money will go. If you don't want to call your plan a "budget" because you don't like that word, call it a "conscious spending and saving plan." When creating or modifying your plan, use the principle of prioritizing to help you decide what to do with your money. See Vertex42's list of budget spreadsheets.

The Principle of Frugal Living

Frugality has to do with restraint and resourcefulness. A frugal person is a wise spender, not just a smart spender.

If you have restraint, you will resist impulse buying, avoid "keeping up with the Joneses", take advantage of coupons and smart shopping tips, and learn to be happy with what you have.

If you are resourceful, you will make what you have last as long as reasonably possible. A resourceful person can save a lot of money by spending time learning how to fix things rather than buying new stuff or paying to have somebody else fix things for them.

It's possible to go overboard with frugality. Wearing a patched suit might not be the best business decision. Living miserably just to save a few pennies may not be wise. If you aren't meant to be a plumber, learn how to prevent the need for repairs so you don't need to call the plumber as often.

The Principle of Avoiding Unnecessary Debt

Debt is a form of leverage that allows a person, business, organization, or government to spend money that they don't have. Whether borrowing is a "good" decision or "bad" decision depends on the situation.

In general, I believe that a person should never go into debt to purchase something they don't need. That is a bad habit to get into. You should save up for what you want so that you can pay in full, without using store credit, financing, or consumer loans.

Credit Cards: I don't believe that credit cards are inherently bad, but they are NOT for everybody and definitely NOT for kids and young college students. Credit cards can be a useful tool if you are responsible, track your credit card charges just like you do with a checkbook, and always pay off the balance in full each month. Use credit cards like debit cards, not to purchase things with money you don't have.

Student Loans: A student loan that helps you get through college may be necessary. A college degree may allow you to get a higher paying job or allow you to gain the skills necessary to work at what you love. After you graduate, though, those student loans are not your friend.

Buying a Home: Buying the wrong home, or the right home at the wrong time, can be one of the worst financial decisions you ever make. Owning a home is often a major goal in life, but make sure that you do your research and your payments are low enough so that you can still feel a degree of freedom.

The Principle of Simplifying

This is probably not a principle of personal finance that you have heard before, and you might not even agree with it. But, it is a principle that I value very highly. I believe in keeping things simple. Simplicity leads to efficiency, understanding, and lower stress.

If you don't understand how an insurance annuity works, it may be best to avoid it. Day trading is complicated and risky, so avoid the stress and just don't even bother with it. Stick to working, saving, budgeting, and the other simple principles. If a type of investment is too complicated, find something else to do with your money.

One of my goals when I create spreadsheets and other tools is to make them as simple to use as possible. It's easy for people to get confused and lost in the details, so I try to make them intuitive. However, I also recognize that spreadsheets aren't always the simplest solution for everyone, so that is why I often recommend other related software.

The Principle of Investing

The principle of investing is not just about saving. It is the principle of "putting your money to work for you." In financial terms, investing is about finding ways to make your money generate income (e.g. interest, dividends, or rents) and/or purchasing assets that grow in value over time so that you can make a profit from selling at a higher price.

In addition to knowing about the different types of investments, a basic understanding of investing requires that you understand:

  • The relationship between risk and return
  • The effects of fees and taxes on different types of investments and investment accounts
  • Diversification, asset allocation, and dollar-cost averaging
  • The difference between a broker and fiduciary
  • The importance of maintaining perspective and emotional discipline
  • The difference between investing and speculating
  • How to classify assets and liabilities (what is your home?)
  • The power of compounding and the time-value of money
  • The liquidity and risks of different types of investments
  • General economic principles such as inflation, supply vs. demand, interest rates, etc.

The Principle of Preparing

Good money management also includes taking steps to prepare for the inevitable emergencies and disasters that happen in life.

Emergency Fund: One of the primary financial goals that a family should work on is to have an emergency fund consisting of cash and other liquid funds that you can use for true emergencies such as unexpected medical catastrophes (e.g. appendectomy or car crash) or losing your job. The usual goal is to have enough in this fund to support your family for 3 to 6 months without a job.

The emergency fund is not for annual expenses or car repairs or a higher-than-usual electric bill. Savings for annual and variable expenses should be included in your budget and held in a different account than your emergency fund.

Insurance: Insurance is designed to protect you and your family from major or catastrophic financial losses. There are some forms of insurance that are a must. These include health insurance, car insurance (if you own a car), homeowners insurance (if you own your home), and life insurance (if you have dependents). Others types of insurance may also be important depending on your situation (fire insurance, flood insurance, professional liability insurance, disability insurance, etc.).

The Principle of Cooperating

When you have a spouse or significant other, cooperation is critical. I'm not a psychologist, so I'm not going to say much about this principle, but just because I don't elaborate doesn't mean that this isn't just as important as the other principles.

Some ideas for ways to cooperate include giving each person their own monthly discretionary cash (some freedom to make individual decisions can be important), deciding whether to keep money in separate accounts or joint accounts, establishing mutually agreed upon goals, treating your partner as an equal partner, and learning how to communicate about finances.


15 comments… add one
  • Just want to thank you ( and Jon Wittwer) for the excellent calendars I have downloaded each December for the past several years. They are beautifully designed and easy to print. This is a wonderful public service you provide.

    Just discovered your 12 Principles of Personal Finance. I believe it to be the best advice I have ever seen on the Internet. You have done an excellent job. I hope many people will take advantage of your good common-sense advice

    Have a Wonderful Christmas / Holiday Season!

    Thanks again!

    Cliff Lowe

  • THX for the common sence principles.
    The approach for me is a bit different (as a french person) but still a really goood article.
    Also thx for the other stuff you put under open service for personnal use. some of them are exelent.

  • I found this website great. So many things I can get from here and they are so useful for me. Thanks a lot.

  • Thank you so much… for a great web site with articles such as the one above and your personal use amortization schedule xls form. It is far more beautiful than I could have done and it saved me 40 minutes + :)

  • I’ve been using your site for nearly a decade now. I still love it. It has helped me in teaching school, in building my house, and in managing all aspects of a large family (9), and a business or two as well. Thanks, Alan

  • Hi Jon!

    Great article! I like your way of boiling down complex subjects into 12 easy personal finance principles.

    As you know, I’ve been a big fan of your spreadsheets for quite some time (I profiled dozens of them on Suite101). Now that I have my own personal finance & taxes blog, I plan on doing the same. Let’s talk!


  • Very good principles of personal finance. I am lucky that I got change to visit this site and the blog. John, you are really doing great job. Now I think that my principle matches your principles and therefore I should follow you

  • thanks for availing these useful information

  • Thanks for this article! It was perfect for teaching my grandchildren too the principles of personal finance! I am going to copy it off now!

  • Dear Sir/Madam,

    Your insights are greatly beneficial to me.

    Thank you for sharing these principles, and taking care of the common humanity by contributing in your own way.

    May you be blessed all days of your life, God be with you.

  • Jon, your advice is excellent – if more people followed this then we’d have a lot fewer societal problems.

  • This is awesome lesson for me. Wow… I am finding several loopholes from my experience on terrible personal financial management. I need to start to apply them. Also, I am starting a small community school for children in my neighborhood, and I think it is a great place to share this. I need to figure out ways to bringing this into conversations with the kids.

    Thank you so much!

  • I’ve occasionally wondered who Vertex42 is (“I want to thank that masked person!”) as I’ve used your spreadsheets for years, but just now came across your blog.The philosophy you’ve expressed in this article enriches my understanding of the design of your products. Thank you for being a force for good in the universe.


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