You don’t need to be a finance genius. You only need to follow the most basic principles of financial education. When it comes to money, the first thing is not so much understanding investments (you will need that later on too) as avoiding certain mistakes.
Whether you are just starting to build your financial education or already have intermediate or advanced knowledge, these 15 points are the fundamental principles to follow. Then we can keep expanding and adding to them.
In many of these points we link to articles where we have covered the topic in question, so with plenty of patience and dedication this simple article can work as a kind of course.
1. Spend less than you earn. See: 5 wealth-building tips so obvious they are fascinating.
It sounds like very obvious advice, but it is not as obvious as it seems.
2. Being able to pay for something doesn’t mean you can afford it.
Most people cannot afford the lifestyle they lead, nor many of the things they buy, even if they can pay for them right now. See: These 2 psychological biases put your finances at risk.
3. Build an emergency fund. See: 5 reasons why you need an emergency fund.
Anyone who wants healthy personal finances has to have an emergency fund: money that should give us the financial fuel to cover our expenses for at least 6 months if we stopped receiving any kind of income.
4. Don’t take on debt.
Debt almost completely wipes out your financial options, especially toxic debt such as credit cards, which charge us interest that no investment can beat. See: This is what an out-of-control credit card does to your finances.
5. If it’s too late, pay more than the minimum on your cards.
The plan of action against a credit card has to be very clear: get rid of it as soon as possible. So don’t pay only the minimum, and don’t invest trying to make money to pay it off. Before you start investing, you should be free of high-interest debt.
6. Know the difference between saving and investing.
Saving is about protecting your money, while investing is about making it grow. Saving on its own is as dangerous as making a bad investment. Sooner or later you will have to make some kind of investment, or your money will lose value to inflation. See: Saving alone won’t lead you to financial success.
7. Know where your money goes.
Small leaks can sink big ships, so we need to keep the most accurate record possible of where those small expenses go, because by the end of the month or the year they can add up to large amounts of money. Download a personal finance template.
8. It’s all about compound interest.
The more money you save and invest, and the sooner you start, the sooner you will reach your financial goal. Here is the difference between starting to save at 25 and at 35.
9. The health of your finances comes down to one question.
As we know, wealth is about building assets that generate passive income, so the only question that measures the true health of our finances is: how much money am I receiving from my assets? Or, put another way: how much money am I receiving without needing to work?
10. Before you trust your money to someone else, you need to understand some basic finance.
Personally, I am not in favour of handing my money to a person or company to manage for me, although I am not saying it shouldn’t be done. But doing so should not excuse you from having enough basic knowledge of finance and investing to know whether what they promise sounds reasonable, and whether the investment idea they offer is attractive. See: 19 investing secrets everyone should know before investing.
11. No ignorant person ever got rich.
All right, there may be the odd exception that proves the rule, but one of the wisest sayings in finance is precisely this: “A fool and his money are soon parted.” Money is a science and a whole field of study in itself, so you will have to study and learn about it. See: The best financial education books.
12. Money doesn’t buy happiness. Financial freedom does.
It is not about how much money you have, but about the peace of mind that money gives you for your future and your family’s. In time, it means you keep working because you want to work, not because you need to.
13. It’s not hard at all.
Financial education and investing can sound very complicated, but if you focus on the basics, I would even dare to say it is genuinely simple for someone who starts early and doesn’t want to do anything crazy with their money.
Sometimes it is the industry itself that makes simple terms sound too complicated. When it comes to long-term investing, an index fund has proven to be one of the most stable investments over time and an excellent money multiplier.
The problem is that most people are focused on beating the market, and that only happens at particular moments.
14. It should be fun.
This is not about becoming obsessed with money. Financial education and building financial freedom should be a fun process. If you are learning about finance and it bores you, we have a problem. And if someone who teaches finance is bored, they have a problem too, and so do the people learning from them.
15. Ultimately, it’s about doing something positive for others.
As Tony Robbins put it, the simplest secret to wealth is to do more for others: give them more and help them more.
Wealth is something you achieve indirectly, and focusing on and obsessing over money alone could only take you further from the goal, although there are different ways to become a millionaire. See: What is the best way to make a million? Answered by millionaires.
Further reading
- 7 incredible ways to make your first million
- 6 things the middle class doesn’t quite understand about the rich
- 5 mistakes we make when we inherit money
Featured image: r. nial bradshaw, CC BY 2.0, via Flickr.
