How to Know the 15 Basic Principles of Personal Finance

Know the 15 Basic Principles of Personal Finance
Know the 15 Basic Principles of Personal Finance

Personal finance is an important part of everyones life. Everyone has their own financial challenges they must face. These challenges can be hard to overcome if you don't have your finances in order. Let me tell you it is definitely easier to spend money than to save it. In order to make any type of financial plan to help you over come those challenges you face you need to understand the basic principals of Personal Finance.

The more you risk the better the return: One of the main parts of personal financing is to save money. People save money for many reasons but it is usually to buy better things and have a better future. One of the ways to save money is by investing it. We of course want to make investments that will increase our savings in the end. We unfortunately can not see into the future to tell what investments will grow and which will flounder. Enron is a good example of this. With all investments there is a certain amount of risk involved. This is also called Risk-Return Trade-Off. The higher the risked investments usually pay the most but you could stand to loose more with these type of investments.

Investments earn money over time: To make money we invest in savings. Why, because usually investments grow over time and in turn will increase your money over time. This is the time value of money.

Diversifying reduces risk: We know that investments all have risks associated with them. Since no one knows the future no one can be 100% sure an investment will do well. This is why you need to diversify your investments. If you put all your money in one investment and it goes bad well life is not fair is it. On the other hand say you spread your money out and invest in several different investments. If one investment goes sour you will not loose everything . This is why you should diversify your investments.

Not all risks are equal: It is best to put your money in both high risk investments and also low risk investments. In a perfect world the two would cancel each other out making no risk involved. However this is not the case. Every investment can be a potential risk. There are always those investments with more risk involved than others. It is up to you to evaluate the risks involved.

Curse of Competitive Investment Markets: Our goal is to make more money. Unfortunately that is everyone else's goal too. This concept is why a competitive market is a curse. Every one looks for a cheap investment that will give them the most return. There goal is to by cheap and then get that invest mend to be worth more. Usually cheap investments don't last long. In other words its hard to beat the system.

Taxes: We all know that any money you make is going to be taxed. That is why for every investment you make it is important to consider the tax implications. The goal is to make more after taxes than before. When making an investment always calculate what your return will be after taxes.

Plan for the unexpected: We all would like to think that our lives are perfect and that nothing will ever happen to us but everyone will face an unexpected emergency once in their lives. You could loose your job, you could loose your house in a natural disaster, there could be a death in the family or your child might become seriously ill. All of these type of emergency situations will cost money. When planning your financial future you need to think about the what ifs and what the what ifs are going to cost.

A Plan: It is easy to procrastinate on making a financial plan. Oh I'm only 20 I won't retire for along time or I've never had an emergence and ever will. Do not underestimate the consequences of what could happen if you run into an emergency with out money nor how you will survive after you retire. Remember you will not accomplish any thing with out a plan.

Knowledge is power: You need to know what your getting into before you end up diving in deep water with out a life boat. When money is involved there are a number of scams out there that you need to avoid. You need to understand why you are investing so that you will stick to your plan. With out knowledge you may miss excellent investment opportunities that you never bothered to research. To make a wise investment you must understand it and make sure it is a worth while investment to get involved with.

Always be insured: Insurance helps us be prepared for those major emergencies that we simply might not have enough money to handle it. One of the worst things that could happen is to be in an emergency with out insurance coverage and with out money. You need to be prepared for major catastrophes like fires, floods, earthquakes, tornadoes or even hurricanes. By having the right kind of insurance coverage you will be protecting your property as well as your investments.

Time and risk of investments: It is better to start investing early on in your life. When you invest early you can put more of your money in those riskier investments. Over time a riskier investment will have excellent days and really bad days. On average the riskier investment will do better than a stable investment over time. If you invest late in life it is better to invest in more stable investments.

Beware of the sales person: When you hire a financial agent you are entrusting him with your money. You need to thoroughly trust your agent. Some agents tend to do what is best for them rather than for you. This is why knowledge is so important. You need to do your research when searching for an agent. You also need to keep track of and be knowledgeable of what investments your agent is investing you in.

You come first: Don't think of savings as a chore but instead think of it as a payment to yourself. Set aside a set amount every time you get a paycheck. The residual will be to pay for those bills.

Money isn't every thing: Do not loose track of what is important in life. Always remember why you are saving your money and the goals you are working for.

Just do it: It will never get done if you don't get started. Saving money is like dieting, it is something you have to continual work at. The only difference is with investments you get a great reward.

I wish you luck in all of your financial futures and investments you will make.

Tips & Warnings

  • Never give up no matter what the odds are.

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