General Principles for Achieving Specific Financial Goals

Personal finance refers to how individuals manage their money and plan for their future. Every financial decision and activity impacts one’s financial health. To enhance financial well-being and habits, it’s crucial to follow some general personal finance rules. Here, we outline five broad principles that can set you on the path to achieving your financial goals.

1. Do the Math—Net Worth and Personal Budgets

Understanding your financial situation requires more than just tracking money in and out. Calculate your net worth (assets minus liabilities) to gauge your current financial standing. Monitoring this figure regularly allows you to assess progress, identify areas needing improvement, and celebrate successes.

Create a personal budget or spending plan, either monthly or annually, to project income and expenses. Categories may vary, but it’s crucial to prioritize essentials like housing, food, healthcare, and transportation before allocating discretionary income toward wants.

2. Recognize and Manage Lifestyle Inflation

Be aware of “lifestyle inflation,” where increased earnings lead to higher spending. While some spending increases are natural as life evolves, periodically review your budget to discern between necessary expenses and those that may be reduced or eliminated.

3. Distinguish Needs vs. Wants—and Spend Mindfully

Differentiate between “needs” (essential for survival) and “wants” (non-essential desires). Prioritize needs like food, shelter, healthcare, and transportation, and allocate discretionary income to wants only after essential needs are met.

4. Start Saving Early

The power of compounding highlights the significance of saving early for long-term goals. Compounding involves reinvesting earnings, and the longer money is reinvested, the greater the potential value. Starting early allows you to save less each month to achieve the same goal.

5. Build and Maintain an Emergency Fund

Establish an emergency fund for unexpected expenses or income interruptions. While the traditional guideline is three to six months’ living expenses, consider saving at least six months’ worth, given today’s economic uncertainties.

Remember that personal finance is an ongoing process. Review and adapt your financial strategies as life circumstances change.

FAQs

• How Do I Calculate My Net Worth? Calculate your net worth by listing all assets and their values, then list all debts. The difference between these lists is your net worth.

• How Do I Create a Budget? Create a budget by listing your income and expenses, both essential and discretionary. Regularly review and adjust it as needed.

• What Is Compound Interest? Compound interest is interest earned on previously earned interest. It accelerates wealth growth when you save or invest money.

• How Much Money Should I Save Each Month? Prioritize essential expenses first, then aim to save at least 10% of your take-home income. The more you save now, the greater your future earning potential.

• How Big Should My Emergency Fund Be? It’s recommended to have at least six months’ worth of living expenses in your emergency fund, adjusted based on your profession and fixed expenses.