Like most people I know, I’ve always had ideas of principles floating around my head at random times. Never written down, never organized, or better yet, never even fully thought out, it’s amazing I’ve the successes I’ve had, but it also explains why I’ve done some really dumb things.
I’m not writing about basic principles like honesty or integrity, but rather more specific principles that govern why I do what I do as it relates to finance. It wasn’t until I was in my 40’s did I realize the significance of writing these things down and constantly revisiting them for my own personal development.
I’ll write more on principles later, and will expand on some of these in later posts, but for now, here are my basic principles as they relate to personal finance:
Frugality
Frugality is my financial and economic discipline and has been carefully designed by me. Your definition or measure of frugality will determine whether or not you become financially independent. You derive your sense of frugality based on your lifestyle, needs and experiences. Your measure of frugality will likely change with a rising income, but never so much that you fall into the trap of constant lifestyle upgrades. Other people will very willingly offer up their opinions of frugality, often in the form of criticism, but if you have thoughtfully derived your own principle of frugality, you can use that as a shield to deflect that criticism and stick to your guns.
Planning
A good financial plan becomes your fortress that protects you from bad ideas, fads, clever sales pitches, and undisciplined knee jerk reactions. It includes goals that are written down, specific and actionable. It gives you a sense of calm when faced with all the chaos the world has to offer when it comes to finance. In my teens and 20’s my plan was a house of cards. In my 40’s it’s a castle with thick granite walls. Bottom line, nothing gets in unless I allow it, and it fits with my plan. The plan not only allows you to make thoughtful and deliberate steps toward financial independence, it gives you a respite from the constant noise and clutter that we see on the internet and hear from those around us. The plan is your foundation and your stress reliever. Put another way, if someone pressures you to buy some hot investment, did they first ask to understand your plan? Of course not, they assume you’re stupid and don’t know any better and that you will buy out of fear of missing out.
Tracking and Data Mining
Track every penny coming in and going out. Tracking is an essential tool in personal finance. You can design your own spreadsheet (what I do) or use any number of online resources. Tracking every single penny in and out is one of the most basic, if oft overlooked aspects to attaining financial freedom. Figure out a way to track that makes sense to you and that you will stick with forever.
Tracking is just the first step though, the real objective is what do you do with all that stuff you track. That’s where data mining comes in. By tracking and organizing your expenses for example, you can start to see patterns that would have otherwise gone unnoticed. Same goes for income and investments. Track what comes in, the returns, dividends, expenses and fees. You’ll be surprised by what you see if you’ve never done this before.
Debt
Don’t like it and don’t want any. If I’m faced with a decision where it looks like I will take on debt, I need to develop a clear and detailed plan to eventually get out of that debt. I’ve revisited this principle a number of times by reading books and blogs (usually relating to real estate). I’ve read about how other people have done great things and built empires with other people’s money (i.e. debt), but I keep coming back to where my mind has always been, I just don’t want debt. My reasoning may be purely psychological as opposed to logical, but I can say that I sleep like a baby, have little stress, and can visualize my financial independence without debt and I like it that way.
Cash
The amount of cash I have is determined by: living expenses, insurance deductibles, anticipated near-term large expenses, my general sense of the economy and safety of my income source, and what makes me feel good. I’ll expand on this topic more, but in essence, I believe the amount of cash one carries has to be carefully tailored to the individual. Finance experts on TV usually preach that people should carry around “3 to 6 months of living expenses”. In the absence of any real thoughtfulness or strategy, that’s probably a good place to start. However, if you start asking the right questions, maybe there’s a better way to go about determining how much cash you should have.
Investments
Determine your risk tolerance and time horizon (i.e. when you need the money and how long it needs to last), keep it simple, stick to what you know, have a long-term plan, and when in doubt, seek advice from a real professional. These ideas may not be new to many, but they are timeless to me. They are essentially what I learned from grandparents that lived through the Great Depression (without the professional advice part, they didn’t trust anyone). That being said, some of the dumbest shit I’ve ever done with respect to finance was when I was in my 20’s and decided I would challenge these principles (swing for the fences investing), only to come full circle and land where I started…but with less money. I shudder to think what I’d have now had I been smart enough to write down my principles at a younger age.
Retirement
I think of retirement as retired from and not necessarily retired. We have the ability to live long and healthy lives and don’t need to be defined our whole life by a single career choice made when we were 23; let alone coaxed into by our family and friends. There’s a lot to learn and do, so from time to time, redefine yourself based on your terms and define your own retirement. My view on retirement has been challenged and completely turned around by the financial independence community, for which I’m extremely grateful.
Financial Freedom
My definition of financial freedom is simply the ability to do what you want to do, when you want to do it. Financial freedom is the ultimate American dream.
In Summary
These principles are not ranked in order, that really isn’t the right way to think about it. Think more in terms of interlocking rings as these are all interrelated. So for example, think about a broad topic like spending. What is my principle around spending? My principle around frugality and planning will keep me from spending on what I deem to be stupid or impulsive, my principle around tracking will allow me to have greater insight into where I’m spending so I can make smarter decisions. My principles around cash and debt will come into play as I don’t want debt, and I want to carefully spend my cash and be mindful of how much I have and why. Make sense?
Lastly, hidden within my financial principles are any number of other virtues or ideas. Things like spending, real estate, credit come to mind. However, I’ve internalized my own way of thinking about these things. Once you start writing down your principles, see what falls out, you really have to develop these ideas yourself and test and refine over time.
What are your financial principles?
Leave a Reply