Personal finance is all about managing your money and making wise financial decisions. The principles of personal finance help you figure out how to achieve your goals by making your money work for you. They apply to understanding your current and future:
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.
Top 7 principles of personal finance
If you are beginning your personal finance journey, many resources are available to help you learn like books, online courses, or talking to a financial advisor.
To start, here are 7 principles of personal finance that can help you manage your money more effectively.
- Set financial goals: Whether saving up for a down payment on a home, becoming debt-free, or saving for medical emergencies, creating a list of financial goals can help you stay motivated and focused. While setting these goals, you must consider your income and daily average expenses. Ensure your goals are clear, achievable and specific.
- Create a budget: By tracking your earnings and spending habits, you can prioritise your spending and know where to cut back. There are several budgeting rules you can follow to maintain good financial health. Here is one: 50-30-20 rule – This popular budgeting rule suggests dividing your income into three sections: 50% for essential requirements, 30% for discretionary spending and 20% for savings. The idea behind the 50-30-20 rule is to help you create a balanced budget that allows you to meet your basic needs, enjoy some discretionary spending and save for the future.
- Live within your means: With credit being available in no time today, it is easy to spend recklessly. Rather than taking action later, spending less than you earn and avoiding unnecessary liabilities is essential from the start. This way, you can find a balance between enjoying your life now and planning for your future.
- Build an emergency fund: Any money you have set aside helps to cover unexpected expenses such as car repairs, medical bills, or a job loss. It is best to save up to 3 – 6 months’ expenses as your emergency corpus.
- Manage debt smartly: Knowing when to take a loan and how to pay it off helps you avoid a debt trap and finance your goals seamlessly. Make sure you have a repayment plan and work to improve your credit score so you can access funds when needed. Knowing the terms and conditions, such as prepayment penalties, processing fees, penal interest and more, is vital to borrow responsibly.
- Save for retirement: Even if retirement is far off, saving now can help you finance your golden years comfortably. You can build a healthy nest egg by starting early and regularly contributing to your chosen retirement schemes.
- Invest wisely: Wealth doesn’t grow overnight; investing wisely can help you accumulate the funds you need. Do your due diligence before investing to avoid unnecessary risks. To develop a healthy investment portfolio, consider diversification in various investment classes. You can follow this strategy for your investments:
100 minus your current age rule
This guideline suggests investing a percentage of your income equal to 100 minus your current age in stocks, with the remainder in bonds or other fixed-income investments. For example, as a 30-year-old, you invest 70% of your portfolio in stocks and 30% in bonds or other fixed-income investments.
The rationale behind this is that you have less time to recover from market downturns as you get older. So, it’s essential to shift your portfolio towards less risky investments. This rule helps you build a balanced and diversified portfolio.
With these principles of personal finance by your side, you can make strategic moves toward improving your financial health. For any finances you need to upgrade your life, rely on Fibe. Get up to ₹5 lac in 10 minutes by downloading our online Personal Loan App and enjoy zero prepayment charges and easy repayment schedules.
FAQs on principles of personal finance
What is the most important principle of personal finance?
The most important principle of personal finance is to spend less than you earn. This simple principle underlies all other financial decisions and is essential for long-term financial stability and success.
What is the meaning of personal finance?
Personal finance refers to managing your money, including income, expenses, savings, investments and debt. It is all about making informed decisions about your money to achieve your financial goals.
What is the benefit of personal finance?
By applying the principles of personal finance, you can experience increased financial security, reduced stress and anxiety and the ability to achieve goals such as saving for retirement, buying a house, or paying off debt.
What are the basics of personal finance?
The basic principles of personal finance include:
- Creating a budget
- Saving for emergencies and long-term goals
- Managing credit
- Investing in the future
You can build a solid foundation for your financial well-being by mastering these basics.