Basic Personal Finance Principles

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Personal FinanceHi All,

There are hundreds of good personal finance blogs on the internet.  They cover all manner of topics – everything from checking accounts to investing in stocks.  But one thing you won’t see is a lot of attention paid to some basic personal finance principles.  These are:

1. Money, income and wealth are not the same thing.  The media and politicians are especially bad about confusing income and wealth.  One can have high income, but have little wealth in the bank to show for it.  Personal finance is focused on wealth.  Most importantly, its is about the accumulation, preservation and deployment (e.g using wealth to generate more wealth) of wealth.

2. Personal finance is about behavior as much as it is about tools.  Lots of personal finance gurus will point you in the direction of websites that help you save money or on-line calculators to help you figure out how expensive your mortgage is going to be.  This is all well and good, but getting your personal finance act together is mainly about lifestyle and behavior.  Its about behavior which underlies values like frugality, entrepreneurialism and thrift.  A great example of this might be eating at home instead of going to a restaurant, or setting up direct deposit to put 20% of your paycheck into retirement.

3. Personal finance means ongoing commitment.  Personal finance is more than just sitting down and paying your bills once per month.  Its about having a budget and sticking to it, researching investing opportunities and making ongoing contributions to your retirement accounts.  In other words its about ongoing commitment to your own wealth and your financial well being.

Why do you need ongoing commitment?  Because it takes a long time for your wealth to accumulate.  For example it can take months to pay off a large amount of credit card debt, or a year or more to save up a house downpayment.  In fact, some writers think the magical “tipping point” in personal finance is owning $650,000 in productive assets – and this can can take a decade to accumulate.  So, you need to commit for the long haul – otherwise you won’t get anywhere.

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3 Responses
  1. Thanks for the link about the $650,000, never thought about it that way. Just want to point out though that I had to edit the link to make it work as there’s an extra “ttp:// “added on the end.

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