Search for Savings & Loans
12 Principles of Personal Finance
Money Management

12 Principles of Personal Finance

It's never too early or late to start thinking about your personal finances. Whether you're just starting out on your own or you've been through a few rough patches, you need to have some guiding principles to help you make sound financial decisions.

In this post, we discuss 12 principles of personal finance by the Jump$tart Coalition. The Jumpstart Coalition is a Washington DC based organisation that promotes financial literacy among young adults. Without further ado, let’s jump straight in.

1. Know Your Take Home Pay

Before committing to significant expenditures, estimate how much income is likely to be available to you after all mandatory deductions.

Your take-home pay is what you earn after tax, insurance, and other deductions such as student loan repayment have been removed from your salary. It’s your net pay.

A benefit of knowing your take-home pay is that you’ll spend less than you earn. This way, you can put more money in your rainy-day fund instead of living from paycheck to paycheck.

A good budgeting rule to help you live within your means is the 50/30/20 rule. It offers guidelines on how to spend your income.

  • 50% Essentials/ Needs
  • 30% Wants/ Personal desires
  • 20% Savings/ investment

2. Pay Yourself First

Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.

“Paying yourself first” means paying your long term savings and investments before anything else. You can pay yourself first by buying insurance, creating an emergency fund, or putting money into your retirement account.

A benefit of paying yourself first is that you prioritise your future needs. However, it can be challenging to pay yourself first, especially if you have other bills. Here’s how to make it easier.

  1. Automate your savings
  2. Start small
  3. Pay off your debts first.

3. Start Saving Young

Recognise that your total savings are determined both by the interest you earn on savings and the time period over which you save.

Start saving young. This is the best way to plan for retirement. When you start saving in your 20s rather than in your 40s, you’ll have more money when you retire. Besides,  you’re likely to acquire other responsibilities you don’t have now, such as family and a mortgage in the future.

4. Compare Interest Rates 

Obtain rate information from multiple financial services firms to get the best value for your money.

When you borrow money, you may be tempted to go with the first offer that comes your way. However, it's important to compare interest rates before borrowing to get the best deal. Otherwise, you could be paying a lot more than you need to. Here are a few ways to compare interest rates before borrowing:

  • Use a loan calculator: A loan calculator will help you compare different interest rates and loan terms. It will also show how much you can save by getting a lower interest rate.
  • Compare rates from different lenders: You can get quotes from different lenders to see who offers the best interest rate. However, be sure to read the fine print before signing anything. You can use Money254 to compare interest rates offered by different lenders. Money254 obtains this information directly from the lenders.

 5. Don't Borrow What You Can't Repay 

Be a responsible borrower who repays as promised, showing that you are worthy of getting credit in the future. Before you borrow, compare your total payment obligations with income that you will have available to make these payments.

To avoid getting intojjj debt, make sure you know how you will repay the debt.  Try listing all your outstanding credits and write down their due date and interest rate. For convenience, pay off debt with the highest interest first. 

6. Budget Your Money 

Create an annual budget to identify expected income and expenses, including savings. This will serve as a guide to help you live within your income.

When you budget your money, you can live a comfortable life without stressing about your finances. There are a few different ways that you can budget your money. One way is to create a budget spreadsheet in which you track your income and expenses each month. Another way is to use a budgeting app or online tool.

No matter how you choose to budget your money, be honest with yourself about your income and expenses. It is also essential to be flexible with your budget. Be prepared to make changes as needed.

7. Money Doubles By “The Rule of 72" 

To determine how long it will take your money to double, divide the interest rate into 72. 

The "Rule of 72" is a mathematical rule of thumb that helps estimate how long it will take for an investment to double. The rule is simple: if you divide 72 by the interest rate, you’ll get the number of years it will take for the investment to double.

For example, if you're earning a 6% rate of return on your money, it will take 12 years for your money to double. If you're earning a 9% rate of return on your money, it will take 8 years for your money to double (72 divided by 9 equals 8).

8. High Returns Equal High Risks 

Recognise that no one will pay you high-interest rates on a sure thing. In most cases, the higher the interest rate offered, the higher the risk of losing some, or all, of the money you invest. Diversification is the best hedge against investment risk.

There is no doubt that high-return investments are also high-risk. When investors look to make a high return on their investment, they are taking on a greater risk that they could lose their money.

You need to do your research before investing in any high-risk venture. The research will help you know the risks associated with the investment and what could cause them to lose money. Additionally, you should only put in as much money as you are comfortable losing if the investment does not work out as planned.

9. Don't Expect Something for Nothing 

Be cautious of advertisements, salespeople, or other sources of financial offers promising anything free or guaranteed investment returns. Like non-financial opportunities, “if it sounds too good to be true, it probably is.”

One of the most important things to remember is that you don’t get something for nothing in finance. This is especially true when it comes to investments. If you're looking for high returns, you'll likely need to take on more risk. And if you're looking for low risk, your returns will likely be lower.

It's also important to remember that there is no such thing as a free lunch in finance. If someone is offering you a deal that sounds too good to be true, it probably is. So, before signing any deal, do your research.

Read Also: Where Do I Keep My Savings? Money Market Fund

10. Map Your Financial Future 

Take time to list your financial goals, with a specific time deadline and dollar cost, and develop a realistic plan for achieving them.

It can be challenging to map out your financial future, but it’s essential. The first step is to figure out what you want. What are your financial goals? Once you know what you want, you need to create a plan to help you achieve those goals.

There are many things to think about when planning for your financial future. You need to consider your current financial situation, age, and how much money you’ll need to live on in retirement. You also need to think about your investment goals and how you can save for them.

Read Also: Money Mastery: How to Set & Actually Achieve Your Financial Goals

11. Your Credit Past Is Your Credit Future 

Be aware that credit bureaus maintain credit reports, which record borrowers' histories of repaying loans. Negative information in credit reports can affect your ability to borrow at a later point.

Your credit past is your credit future. This is a quote often heard regarding credit scores and credit reports. It means that your credit history indicates how you will handle money in the future. If you have a good credit history, lenders are more likely to trust you with a loan or line of credit.

On the other hand, if you have a poor credit history, it will be difficult for you to get approved for a loan or line of credit. That’s why you need to maintain a good credit history by making on-time payments and paying off your debt.

Read Also: Coping With Debt: How To Deal With Debt of Any Size

12. Stay Insured 

Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan.

No one knows when an unexpected accident or incident will occur. That’s why it’s important to get insured. Insurance gives you peace of mind knowing that you and your loved ones are taken care of financially if something happens.

There are different insurance policies, so it’s crucial to find one that fits your needs. You can find insurance for your car, home, health, and more. Make sure you are fully insured to relax and enjoy life without worrying about the unexpected.

Wrapping it Up

Personal finance can be confusing, but following these 12 principles can help you stay on track. These principles will help you save money, invest for the future, and live within your means. Keep these tips in mind, and you will be able to achieve financial success.

No items found.

Washika is a seasoned SEO content writer and copywriter with proven experience in creating unique, insightful and engaging content for a wide range of audiences that ranks high on search engines. Learn more about his work by visiting his LinkedIn profile.

Get the Money254 App and don't miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.

Get it on Google Play
A person holds the Money254 App in their hand.

Welcome to Money254 - your simple way to compare loans in Kenya online.

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Download the new Money254 App and don’t miss out on the next article.

Join 1.5M Kenyans using Money254 to find better loans, savings accounts, and money tips today.
Get it on Google Play

Learn more about Personal Loans available in Kenya on Money254

Money 254 is a new platform focused on helping you make more out of the money you have. We've created a simple, fast and secure way to find and compare financial products that best match your needs. All of the information shown is from products available at established financial institutions that our team of experts has tirelessly collected.

Instantly search loan products from established providers in Kenya and compare on the terms that matter most to you.
Find the best Personal Loans for me

Don't miss another article - download the new Money254 App Today

Get it on Google Play
Download the Money254 app on Google Playstore

Sign up for our newsletter and get weekly money tips to your inbox.

Get updates from the Money254 team on financial news and new Money254 features.