What Are the 12 Principles of Personal Finance?

Personal finance was not a subject taught in the schools I attended. Perhaps you had a similar experience and are struggling financially. 

Fortunately, the Jump$tart Coalition for Personal Financial Literacy, a nonprofit organization that educates people on the proper use of money, developed the 12 principles of personal finance that can be applied at any age. Understanding how money works helps adults improve their saving and spending habits to reach their financial goals.

The following are the 12 principles of personal finance.

 

1.    Know Your Take-Home Pay

Your take-home pay is the amount available for saving and spending after all deductions, such as taxes, are taken from your paycheck. Understanding how much money is available lets you allocate your income accordingly.

2.    Create a Spending Plan

Develop an annual spending plan to determine where your income goes. Including your short- and long-term savings goals and monthly expenses helps you live within your means. You can learn more in my post, What Are the 5 Main Areas of Personal Finance?  

3.    Pay Yourself First

Set aside part of each paycheck to cover unexpected expenses and long-term goals before paying your bills. Borrowing from your savings to pay for emergencies and replenishing the amount helps you avoid taking on debt.

4.    Compare Interest Rates

The interest rate on a loan, such as a mortgage or car loan, impacts the total cost of the loan. Longer exposure to the interest rate, such as a 5-year loan compared to a 4-year loan, further increases the overall amount paid. Always compare interest rates and loan lengths from multiple lenders to get the best value.

5.    Avoid Borrowing What You Cannot Repay

If you borrow money for a significant purchase, such as a mortgage or car loan, ensure you can comfortably make the monthly payments on time. If you use a credit card to cover expenses, always pay the balance by the due date. Properly managing your debt increases your ability to borrow money in the future.  

6.    Be Mindful That Your Past Credit Impacts Your Future Credit

The three main credit bureaus maintain records of your loan amounts, on-time payments, and related details. Lenders check these credit reports to determine whether to extend any loans you request. Therefore, paying back your loans on time improves your credit score and ability to borrow money in the future.

7.    Plan Your Financial Future

Write down your short- and long-term financial goals. Common examples include:

• Saving for emergencies

• Buying a car

• Purchasing a home

• Paying for a wedding

• Raising children

• Traveling

• Funding your children’s education

• Saving for retirement

Create a plan to achieve your financial goals. Online resources, apps, and financial professionals can help you reach your objectives.

8.    Purchase Insurance

Insurance helps protect you and your loved ones from financial loss in case of illness or accident. Common types of insurance include:

• Health

• Auto

• Home

• Life

9.    Begin Investing Now

Creating an investment plan now allows your money to grow. The interest rate and time spent invested impact the return.

10. Understand the Rule of 72

The Rule of 72 calculates approximately how long an investment needs to double in value based on its annual return rate. You can determine how long it would take for your savings to double by dividing 72 by the interest rate. For instance, if you saved $5,000 at a 6% interest rate, your savings should double to $10,000 in 12 years.

Be mindful that the Rule of 72 can work for or against you. When you save money, such as in a retirement account, the rule works in your favor. However, if you carry a credit card balance and pay only the minimum monthly amount, the rule works against you. Therefore, paying off your credit card monthly is recommended.

11. Remember That High Investment Returns Have High Risks

Your risk tolerance impacts whether you invest in financial products with potentially high returns. If you decide to invest in high-risk financial products, such as hedge funds, you also should invest in low-risk products, such as bonds. Diversification helps reduce your overall risk and protect your investments.

12. Keep in Mind You Cannot Receive Something for Nothing

If something sounds too good to be true, it probably is. Use credible resources to research whether an opportunity is legal and fits your risk tolerance before deciding whether to invest in it.

*This information is for educational purposes only.