What are the 3 principles of personal finance?

Personal finance is the management of ones own or family's finances. This includes all facets of money from budgeting, banking and savings and one that we are all surely aware of - spending. In regards to investing, this also includes assessing risks and life planning.

Success in personal finance is progression, not perfection. Good habits over time will get you to where you want to be as opposed to a sudden and dramatic change.

There are numerous books and articles written in regards to personal finance and you could easily spend a lot of time reading and researching them. Some are great, others are motivational and a small subset is actual and actionable information.

Personal finance is simple. In this article I'll be talking about 3 basic personal finance principles. These are IMHO the most important and a good starting point for anyone to get into these good habits of managing finances.

1. Spend less than what you earn
2. Make your money work for you
3. Preparation is key

Let's get into each one and add a bit more detail.

Spend less than what you earn

This is the most important one and sometimes the most difficult one to do. If you have kids this is good one to teach early! It's hard to realize how much we're spending especially when there are a lot of little expenses here and there. All those little expenses, such as coffee, lunch outs, shopping, will add up over time and before you know you could be way over what you're expecting. So how do you get this started?

First, take time to actually see how much money is coming in or how much you are actually earning. Once you have a good idea how much you earn, you should create a spending budget/rule next. A good one that I personally use is the 50/30/20 rule. 50% for living and necessary expenses, 30% for nice to haves such as luxury items, entertainment, and 20% for savings.

Life happens and its stressful enough to have to worry about money as well. These 2 steps alone will help you stay in control of your financial situation.

Make your money work for you

Making your money work for you is basically figuring out a way to automate your earnings that require little to no effort. In other words, passive income. Some passive income examples include investments, rental income and just about any business activity in where you do not need to materially participate.

Here are some ideas to get you started right away.

1. Index Funds or ETFs - An index fund is basically a collection of stocks designed to track a market index, like the S&P 500 (Standard and Poor's 500). An ETF (Exchange-Traded Fund) is a collection of stocks as well along with other assets such as bonds. Both offer diversification which lowers risk, and offers lower fees and taxes. These are hands-off investments so it can be considered truly passive income. Just sit back and watch the returns pour in over time. Check out StockPile or RobinHood to get started easily.
2. REITs - A REIT, or Real Estate Investment Trust, typically invests in income-producing real estate or high-interest debt service so they tend to pay generous dividends. Its easy to get started and you can buy and sell pretty easily and benefit from the diversification. These can be a bit more pricey to get started and could be subject to actual real estate market trends. Check out FundRise or Modiv to get started.
3. P2P Lending - P2P or Peer to Peer Lending is basically lending money to individuals using platforms such as Prosper or Lending Club. I do this myself and depending on the platform can be pretty hands-off. Returns at the time of writing this article can range from 6-10% but carry a certain degree of risk. The higher the return the larger the risk. Pay close attention when picking and choosing borrowers or loan requests.
4. Vehicle Advertising - if you have a car and dont mind a little advertisements on it you can make a decent amount of change just by driving around. Check out StickerRide or Wrapify. Note that payments vary and are based on the car you drive, location, and distance.
5. Answer Surveys - there are numerous websites that pay you to take survey. While this option takes up time the effort is very minimal. Check out Swagbucks or InboxDollars to get started right away.
6. Stock Photos - If you're a photographer you can monetize your photos through sites like ShutterStock or iStockPhoto. You basically sell your rights to your photographs so that businesses and brands can use them for their own purposes.

These are a few ideas to get started. The most important thing for me when creating this list was a low time investment for some passive returns.

Preparation is key

Life happens and we need to be prepared for any large expenses that may come about. Emergency savings protects you from financial emergencies such as job loss, long-term illness and unforeseen home or car repairs to name a few. The  COVID-19 shutdown was a great example of how important it is to have such an emergency fund.

The size of an emergency find varies based on lifestyle, monthly income and costs as well as dependents. A good rule of thumb is to put away at least 3 to 6 months work of expenses. This amount seems daunting but a good way to start his is to put a small amount away each time you get paid to build up to that goal. This would be from the 20% of the budget/spending rule I mentioned earlier in this article.

Once you've established how to build such a fund you need to decide where to hold it. A good place to hold such a fund would be an interest-earning savings account, or money market account. These accounts should be accessible easily without taxes or penalties. This is the main reason why mutual funds, IRA's, Stocks, or other asset account types may not be suitable as your funds may lose value if the funds are accessed quickly.

Start Now!

It's never too late to get things started and the best time is now. Honestly, thats the most difficult process. Planning is a vital step but don't get stuck there. The key is action and the rubber needs to meet the road. Good luck and always continue learning, I sure am!