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The principles of finance

The principles of finance aren’t difficult to understand – however, many adults shy away from learning about money and finance because of fear, a perception that finance is difficult to understand and not wanting to face the reality of their financial situation.

The good news though is that the maths and principles of finance are easy – money in less money out equals cash flow, and the aim is to keep a positive cash flow. Where it becomes more difficult is in understanding all the nuances of how the world economy works and how this affects your local circumstances in terms of stock market movements, interest rates and even impacts on the employment market.

But for your personal finance needs, you need to understand some basic principles of finance and HOW to deal with money, because if you UNDERSTAND money you are better able to MANAGE your money.

  • Understand that a certain amount of money is necessary – too little will cause stress and having too much also has this effect. Money can’t buy happiness, but it is the currency for living the lifestyle you desire.

  • Know how much money you REALLY need. The endless pursuit of more money for no reason will ultimately end in failure and your unhappiness. Read this ‘warning on consumerism’ to find out more…

  • Set short and long term financial goals.

  • Manage your career or business wisely – it is probably your main source of income.

  • Understand that financial management is just a skill – it’s not hard and there are no magic tricks.

  • Keep all your finance records in an organised file.

  • Maintain a healthy awareness of your finances – know what you earn and what you owe. You should know exactly where all your money goes and what your net worth is.

  • Maintain a positive cash flow – you need to earn more money than you spend. And what you don’t spend you need to save or use to reduce your debts.

  • Understand that wealth is more than cash flow – it includes your assets (such as your house if you own it) and your ability to create wealth. But you need a positive cash flow too.

  • Understand that you need to ‘pay yourself’ first – set aside 10% of your income (after tax) as savings. And plan for retirement NOW!

  • Embrace the power of compound interest – and understand that starting early produces the best results. Also understand that you will pay compound interest on your credit card balance if you don’t pay off the full amount each month.

  • Understand that you earn interest or dividends on your investments, and you pay interest on your debts – that’s how financial institutions make their money. Debt is not necessarily a bad thing, but you need to avoid bad debt and manage good debt properly.

  • Know when to get help with your finances – get help with debt consolidation and ALWAYS seek unbiased financial advice before investing your hard earned cash in anything. Talk to a financial advisor NOW if you haven’t yet thought seriously about how you’re going to fund your retirement.

  • Know that tax is important and we all need to pay our fair share – it funds public infrastructure and services that we all use. But you can optimise your tax bill and make sure you don’t pay more than you need to.

  • Understand that charity is a good thing, because it makes us appreciate that we really are OK financially – contribute 10% of your net (after tax) income to charity if you can. And remember that contributions to approved charities are tax deductible! If you can’t spare any of your income for charity, then donate your time and become a volunteer!

  • Understand that to make money, you need to spend money (and maybe borrow money) – but do this wisely. Avoid bad debt and endeavour to pay off your debts as soon as possible.

  • Understand the importance of wealth protection. Get insured - protect what you’ve got from what you don’t know. Protect your health, your income, your business, your life and your assets (your house and your car mainly). And protect yourself against public liability.

  • Understand that ALL investments involve a level of risk but some are riskier than others. High return investments are almost ALWAYS high risk, or high input. Know your risk profile.

  • Protect yourself from identity theft and fraud. Beware of scams and ‘get rich quick’ schemes. If an investment sounds too good to be true, it is! Beware of any scheme from Nigeria – the scam capital of the world!

There is also some terminology on the principles of finance you need to know… And get your family involved too and teach them the principles of finance – particularly your kids. Managing personal finances and setting financial goals is an important life skill for everyone.
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We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.

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