When my interest in personal finance began to grow, I began to seek out knowledge from sources such as books, the Internet and personal advice, as well as various other sources. But if you’ve ever read more than one finance book, or read more than one personal finance blog, you realize there can be conflicting opinions and advice when it comes to what you should do with your money. Who’s right and who’s wrong? It can be hard to weed through the throngs of advice that people are trying to thrust upon you, but one thing I’ve learned to count on while learning about personal finance is repetition. If I read an idea or some advice in a book or online, I usually think about what I’ve read and kind of set it aside in my mind. If I hear that same idea or advice from someone else, I think about it more. But if I notice many different people all advising a similar principle, I listen up because I realize they are probably onto something.
There may be certain financial decisions that will work well for some people, but not for others. You may see this advice featured in one book, but frowned upon in another. There may also be different investing “strategies” you can use with your money that will differ from book to book. But I’ve noticed a few key financial principles that I’ve seen repeated in books, on blogs, on money TV shows and from people I know. I consider these principles to be sound advice because obviously they have worked for many different people before me. Here are a couple of the repeated financial principles I’ve learned about and decided to implement in my own finances.
Start young: It is never too early to start thinking about retirement. When you are young, you have time on your side and compounding interest can do a wonder with your retirement savings. I’ve heard this many times before, but I find it most profound coming from older people who wished they would have started earlier. “If only I had learned about this stuff before” or “I should have started this earlier.” I’ve heard it many times and while they can’t go back in time, I in a sense can. I’m still young and I can either learn from people who wish they would have started younger or I can become one of those people later regretting that I waited to start investing. With so many people wishing they would have started earlier, I just decided that I would do just that and skip the later regret.
Avoid or pay off credit card debt: Carrying a balance on your credit cards keeps you in bondage to monthly payments and interest payments when you could be using that same money to invest and further your financial goals. With changing interest rates, payments can fluctuate from month to month and take a huge hit on your monthly financial resources. Plus, when you are carrying credit card debt, it is a good indicator that you are not following the next principle.
Live within your means: This is a pretty basic one, but it’s amazing how many people don’t get it. It’s not about having what your friend has or even buying what you think you should have at this point in your life, it’s about what you can afford. Don’t have enough money left at the end of each month to put into savings? Cancel your cable subscription. Some may find the thought of not having cable appalling, but if you can’t afford, then you shouldn’t have it. With the immediate satisfaction bug running rampant in our society, so many people are charging items on their credit cards instead of paying for them outright because they can’t afford to pay for them. But often they don’t think about the fact that by charging that item, they are in fact living beyond their means and spending more than they make.
Have an emergency fund: I had always known it was a good idea to have some money saved in case something unexpected were to happen, but it wasn’t until I started reading personal finance books that I heard the term “emergency fund.” At this point I can’t tell you how many places I’ve read about this principle and why it’s such a good idea and why it’s so important. I’ve hear varying numbers for what should be in your emergency account — from $500 all the way to 2 years of living expenses. 3-6 months of expenses seems to be the average I’ve seen and I would say is definitely a good start. I have often thought that an emergency will not happen to me and that I won’t need that much money for anything unexpected, but I’ve read about many people who have needed it and whose emergency funds have come in handy. I’ve also read of many people who didn’t have an emergency fund in place but wish they would have after something happened to them. Whether I need that much money or not, I decided that it’s just a good idea to stash that money and learn from others who have lived life before me and have learned a thing or two about needing some extra cash at just the right moment.
Invest in a Roth IRA: Funding a retirement plan is another piece of advice I hear all the time, but there are many different options for retirement plans that it can be confusing to decide which one to invest in. For the most part, people will tell you that a Roth IRA is the way to go if you are eligible to contribute to one. With the money being tax free when you take it out at retirement, it can save you a lot of money. Of course, if you receive a matching contribution on your work sponsored retirement plan, it is usually the best idea to contribute the maximum amount of money that they will match, and invest the rest in a Roth IRA. Paying taxes on the money you invest now so you don’t have to pay the taxes later is another example of you can benefit more by delaying gratification.
These are just a few of the financial principles I’ve learned from many different sources and I think for the most part they are good steps for anyone to take. It’s difficult to get thousands of financial advisors to agree on certain principles, but the basics tend to be just that — basic starting blocks that anyone can use and benefit from. Next time you hear something that you’ve heard a million times before — listen up — they may just be on to something.
Image courtesy of klynslis