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Ten Fundamental Concepts in Personal Finance

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The fundamentals of personal finance aren’t very complex and I doubt you’ll find anyone who can reasonably dispute that but it’s a lot like the law, the difficulty is in the various nuances and unique scenarios that always seem to crop up. I’d like to put these fundamental concepts up for critique and ask what you think of them, whether one should be replaced, one should be added, etc. so that we can reach a consensus on what the ten fundamental concepts of personal finance are.

1. Spend Less Than You Earn

Don’t eat more calories than you burn, don’t spend more dollars than you earn, it’s pretty simple and it’s the number one thing that you can do that can guarantee you’ll be financial prosperous. Heck, you can probably stop reading here if you follow #1 and do just fine.

2. Thinking About Money Sucks, But It Can Be Easy

Thinking about money and thinking about the future isn’t a lot of fun for most people. You probably don’t know what you’re doing this weekend, let alone what you’ll be doing when you retire in 20, 30, 40, or 50 years. That’s okay, the beauty of a lot of financial planning is that you can set it and forget it, Ronco style, enjoying the fruits of your smart decisions down the road with a minimum of pain now. For example, if you’re employed and have a 401(k), just drop 5% into it each month. You probably won’t feel the pain but you’ll enjoy seeing the balance when you retire.

3. You Don’t Have To Follow The Crowd

If you see the latest stock or investment start climbing in value, you may feel tempted to jump on the bandwagon so you aren’t “left behind.” This is as true in other aspects of life as it is in investing and it’s something that you have to come to grips with. Not moving forward is not the same as not moving back, you have to remember to pick your spots and remember your fundamentals, whether its your moral code or your investing decisions. Sometimes the boat sails with you on it and sometimes that boat hits an iceberg and sinks to the bottom of the sea, remember your fundamentals and you’ll end up doing just fine not chasing the latest fads.

4. Retirement Savings Order – 401k With Match, Roth, 401K, Everything Else

When it comes to saving for retirement, nothing can beat a 401(k) plan where your employer kicks in a few dollars to match your own contribution. Nothing in life is free but this is pretty darn close. Once you maximize that, start funneling money into a Roth IRA until you max that out. Then, polish off the 401K. If you still have money you want to save, put it in an investment fund but remember to enjoy life.

5. Avoid Debt Unless It’s For A House, Car, or Education

There are three things in life that you should be willing to go into debt for – your house, your car, and your education. Heck, the government even gives you a tax break for financing your house and your education, so you should take advantage of it while you can. As for the car, it’s probably necessary if you want to get anywhere in most places of the United States. With all three, don’t go all out, only buy that which you think you’ll reasonably need and you’ll do fine. That also means don’t get deep deep into debt if you can avoid it, so don’t buy too much house and too much car – ultimately no one else will care (or they will take advantage of you, which is even worse).

6. Showing Off Breeds Either Jealousy or Annoyance

You know that whole keeping up with the Joneses concept? Think about the last time you saw someone drive around in a flashy car, you probably thought he or she was overcompensating for something. How about that big television they were showing off to you? How about that gynormous house? You probably were either jealous of them or you were annoyed at them showing it off, either way the feeling is negative. So, why would you want to try to keep up and have other people be jealous of you or annoyed at you? Either way they won’t like you!

7. Scrap The Latte Factor

This is a term coined by David Bach and it’s the idea that if you cut out small unnecessary spending, like a cup of Starbucks, you can put that money away and it can grow tremendously. Think of all the little dinky crap things you buy, maybe from impulse, maybe from habit, and try to cut them out because you could save yourself some serious money.

8. If It’s Too Good To Be True, It Is

There will come a time when someone will come to you with an offer that seems unbelievable, whether it’s a hot stock tip or a great investment or some other scheme – don’t buy it. The true path to financial prosperity takes hard work and diligence, not sending envelopes of money or cashing a check for a guy in Nigeria. Your brain can sniff out a scam, don’t let your greed block out the scent of a bad deal.

9. Life Is About Enjoyment, Not Money

You can’t buy love and the best things in life are free. Think about all the lottery winners who end up dead in a ditch, or the star athletes getting into domestic disputes and thrown in jail, or the powerful executive that missed his or her children growing up – life isn’t about the cash. Life is about enjoying the time you have here with your loved ones, not about getting more and more money. Money can’t buy you time and time is precious.

10. Always Act Morally, Ethically, Truthfully & Legally

No matter what you believe in spiritually, the judge of your actions here on Earth will ultimately have his, her, or their say and money carries no weight there. And if you don’t believe in anything past this life, always remember that your Mom is watching.

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26 Responses to “Ten Fundamental Concepts in Personal Finance”

  1. Aaron says:

    Great post, but I think the rationale behind #10 could be a little less abstract and more personal-finance oriented, especially for those of us who are non-believers. Here are three additional reasons to act morally, ethically, truthfully, and legally:

    1. Not acting legally and aboveboard can be EXPENSIVE, and the stress can be hazardous to your health. Just ask Kenneth Lay.

    2. Acting morally and fairly makes you feel good, while taking advantage of people makes you feel miserable. Just ask Ebeneezer Scrooge.

    3. Most truly successful people are able to achieve great things (and great wealth) through contacts and networking. The reason networking works is because of TRUST. If you do not act morally, ethically, truthfully, or legally, people will lose their trust in you and your contacts will no longer help you succeed. Just ask W.

    • jim says:

      Very true, I wanted to make the last one a little more abstract, as the list goes from concrete $$$ ideas to more and more abstract, with the 10th as arguably the most abstract and disconnected from actual money.

  2. LAMoneyGuy says:

    Excellent list. The only one with which I would have reservation is #5. Agree for house, generally for education, and not as much for car. I think debt for cars should really be avoided as much as possible.

  3. Matt says:

    Great post. I think this should be a staple for anyone looking to look further into their own finances.

    Some of the concepts are so simple, yet most people don’t realize it until they’re knee-deep in debt.

    Kudos!

  4. Easy E says:

    I would change #5. I wouldn’t include a car. I think you should avoid going into debt for any depreciating asset including a car. You can get a car to get you where you want to go for almost any price. So buy the car you need and save your money until you can pay cash for the car you want.

    I’m still young, but I’ve never taken out a loan for a car and I plan on never doing it.

  5. jim says:

    I thought a little about the car but in many places in the US, you can’t get from your home to your job without one. It’s like an education, you can survive without a college education but having one will open up the number of opportunities you may be given – much like the freedom of a car will open up opportunities.

    Just as you wouldn’t buy too much house, you can’t buy too much car either.

  6. Savvy Steward says:

    Great post Jim.

    I’d modify #1 to include something about savings.

    There needs to be a shift in mindsent. Most people operate on the formula below:
    income – expenses = savings

    Instead we should be following this rule:
    income – savings = expenses

    We decide first how much to save, and then our expenses needed to be scaled accordingly.

  7. wanzman says:

    I would generally say to to follow #1, 4, and 9 as being the most important to me. Just looking at it from a super simplistic point of view. Good list.

  8. Debt Hater says:

    Thanks for the list! No matter how fundamental these things are, it always helps to periodically review them to make sure you’re still on track (of course, i am speaking totally about my self!). I think #9 is most important. The purpose of money is to do all the things you enjoy. Frankly, that’s what motivates me to get my finances in order. I know what I want in life and I can’t get it or do it with debt hanging from my neck and no safety net for the future.

  9. plonkee says:

    I can’t believe that you’ve met my mum.

    In order of importance – which I realise is not what you are doing – I’d have 10, 1, 8, 2, 3, 4, 5, 6, 7, 9

  10. George says:

    I think LAMoneyguy’s point wasn’t that you shouldn’t have a car, it was that you shouldn’t take on debt for the sake of buying a car.

    Cars are some of the fastest-depreciating items that you can buy – some of them are only worth 50% of the purchase price within three years.

    If you avoid keeping up with the Jones’ (see No. 6), then you shouldn’t need to drive a brand new car every few years. Buy a used, reliable car that’s 3-5 years old and pay cash for it instead of financing. You’ll get many years of use out of it, for a fraction of the cost.

    The usual advice in this area is to take the money that you would put toward a car payment, and keep making it after you buy the car. Put the money into savings, and by the time your car needs to be replaced, there will be enough money in there to buy a new (used) car.

  11. KMC says:

    Thanks for the list, Jim. You’re right that probably 80% of PF is the basics.
    I would include two more, though. How about something like “Get your paperwork in order”? It’s important, I think, to have a will, power of attorney, etc. A second I’d add would be, “Get the proper kind and proper amount of insurance.”

  12. Time out… I need to comment about the car thing.

    Bottom feeding purchases (simply basing a decision on cash outlay) is a dangerous route. We all know people who based a decision on price alone only to end up with short-term junk.

    I went into debt ten years ago to buy a German luxury station wagon. It’s been paid off for over five years and still looks and runs like new. And I know that I am driving my family around in a steel cage of safety. The point is that spending a bit extra, or stretching for the best long term value usually saves money over the long run. Friends have gone through 4 or 5 crappy but brand new Chrysler mini-vans in the same span of time I’ve been driving my one car. Sure, they paid less at purchase time, but they’ve made 5 purchases that when totaled, equal $40k less than I spent ten years ago. And no… the car’s not been in the garage for anything but annual oil changes (as recommended by the manufacturer) and new tires.

  13. nolandda says:

    I would probabaly rephrase #10 as:

    Act Morally, Ethically, and Truthfully. When a law does not conflict with your morals, your ethics, or the truth then you should also act legally.

  14. George says:

    useaclotheslinenotadryer: I think you’ve missed my point. Spending less money on a car does not equate to buying junk.

    Instead of buying brand new, you could have bought a 3-4 year old “German Luxury Station Wagon” for 40% less than you paid. You’d still get the same vehicle, and it probably would still give you the same service life. It’d just cost you 40% less.

  15. I never said that I bought it new… sorry. It was used. And I agree with your point.. do not buy junk.

  16. In my opinion don’t buy useless stuff, rather save money for future.

  17. adam says:

    i like this post. Its really worth to make your budget and save your money.

  18. Brian H says:

    Awesome post…though I do disagree w/ going into debt for a car. Education and homes are different because they are investments. There are decent used cars that can get you from Point A to Point B that cost less than $5000. Goes back to point #1, living w/in your means.

  19. Andrea says:

    Great list, and a few comments –

    1. Spend Less Than You Earn – I know what you’re saying and it’s a good start but really, you should just spend as little as possible while still maintaining what you personally consider a reasonable lifestyle (meaning as in point #4 – “enjoy life”). Spending less than you earn should be a starting point, but it’s really not enough. I know a couple (no kids) who make about $200k and barely spend less than what they earn, but they’re still terrified at the prospect of retirement.

    4. Retirement Savings Order – 401k With Match, Roth, 401K, Everything Else – don’t forget to see if your company offers a Roth 401k.

    5. Avoid Debt Unless It’s For A House, Car, or Education – I know everyone’s harping on the car debt question, but I even wonder about the education debt question. Can you (or your kids) take some core classes at community college? In our area, my sons could theoretically have their freshman year covered by the time they graduate from high school and if they take college classes while still in high school, the school district will cover part of the tuition! Personally, I don’t think it matters as much where you start as where you finish, and I don’t think it’s necessary for kids to move out and “experience life” in order to get a good education. And use those 529′s if you can … if you overfund for one child (or that child decides not to go to college), you can give the money to another child.

    6. Showing Off Breeds Either Jealousy or Annoyance – besides those feelings, it would be wise to remember that they probably can’t really afford their toys. Enjoy financial freedom and the decreased stress that comes with it instead of worrying about what your neighbors think. They care about you about as little as you ultimately care about them.

    8. If It’s Too Good To Be True, It Is – and remember, potential reward goes hand in hand with potential risk. Don’t go sue your planner if the dollar signs in your own eyes blinded you to investment risk.

  20. Ben says:

    I think having a base set of principles to guide your money actions is a great idea. It might help simplify your financial decisions, when you’re not sure what to do, refer back to the list.

  21. BS says:

    Like Easy E said above, borrowing for a car just isn’t necessary.

    I read a formula in a personal finance book once, can’t remember the source now. It went something like this:

    Step 1: Figure out how much cash you have to spend on a car.
    Step 2: Find a car for that amount of money. Stick to your budget even if it is only $500.
    Step 3: Every month, put the amount your car payment would be into a savings fund for your new car.
    Step 4: When your car dies in a few months (or hopefully years) from now, repeat at step 1, using your savings fund.

    Alternative to Step 1, not available in all areas: buy a bus/train pass, skip the car. You can buy one later using the savings fund if you decide you really need to.

  22. Minimum Wage says:

    I earn minimum wage and have student loan debt. Is it realistic to expect me to spend less than I earn?

  23. LDC says:

    This comment is for the one who did not like #10 because of it being abstract and do not believe, maybe you need to pick up a Bible. No matter how much money you have now you can’t take it with you, regardless of whether you believe or not. They do say that people that do not believe now will believe before they die.


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