There are 10 principles of financial management that can help you achieve your financial goals. By following a plan and sticking to it, you will be able to make smart financial decisions that will help you reach your targets. Implementing these principles into your life may seem like extra work at first, but over time it will become second nature. So, what are the 10 principles of financial management? Let’s take a look!
What Are The 10 Principles of Financial Management
Organization
The first step is to get organized. This means creating a budget and tracking your progress. You need to know where your money is going in order to make the best decisions possible. You should start by listing all expenses, debt repayments and any outgoings, When you write things down, it is far easier to appreciate where you are able to make savings and also see where you are bleeding money from.
This organization becomes easier as time goes on, it only needs to be set up once, either by using a spreadsheet or a budgeting tool platform.
Live Within Your Means
This principle is all about spending less than you earn. It sounds simple enough, but in reality, it can be quite difficult for some. A lot of people struggle with this one as they often compare their lifestyle to those around them and feel the need to keep up.
If you want to get ahead financially, you need to focus on your own situation. Live within your means and don’t try to ‘keep up with the Joneses’. They may be in a lot of debt and not as well-off as you think!
This ties into organization, once you understand how much you are spending each month, you will understand where you are overspending and what you can eliminate.
Invest Invest Invest!
Investing is one of the smartest things you can do for your future. It may seem like a scary concept, but there are plenty of options out there to suit everyone.
The key is to start small and increase your investment over time. Investing early on will give you the opportunity to grow your money and reach your goals quicker, effectively reaching a point of potential retirement in your early 50’s, if you start in your late teens, early 20’s!
Make your money work for you is a prime phrase here, and it really is true!
Vanguard and Fidelity are two very good options out there currently.
Spend Smart
We all have to spend money, but that doesn’t mean we have to spend it all!
Think about your purchases and whether you really need them. There are a lot of things in life that we want, but do we really need them?
It’s important to be mindful of our spending and understand the difference between our wants and our needs.
If we can focus on spending our money on things that we need, rather than things that we want, we will be in a much better position financially.
The number one rule for spending that everyone should follow if they wish to become wealthy is: Is this item I want to buy, an asset or a liability? If everyone used this simple question and asked themselves it every time they were to think of purchasing or even going into debt for something of significant value, more people would understand the concept of wealth.
Some investors even suggest that buying a home outright or even with a mortgage, is a liability as the asset does not produce income, but this could be taking things a little to far if you have a family to take care of, however, the principles of financial management are still the same.
There are various asset management companies available that you can work with to prepare you or complete a due diligence for you.
Is this purchase an asset or a liability? Always ask yourself this question, this is how you build wealth.
ABL – Always Be Learning
Most of the wealthiest business owners and investors all have this in common, they are always eager to learn new things, grow their knowledge and understand how they can improve.
You should never stop learning, whether it’s about money, business or personal development. There are always new things to learn and new ways to grow.
If you want to be wealthy, you need to be willing to put in the effort to learn and grow. The more you know, the better decisions you will be able to make in the future, wealth is very much interconnected with wisdom.
Due Diligence
This principle is all about doing your research.
Before you make any financial decisions, it’s important to do your due diligence and understand all of the options available to you.
There are a lot of different products out there, and it can be easy to get caught up in the marketing hype, do not be afraid to ask for help.
But if you take the time to really understand what’s available and what would work best for you, you’ll be able to make much better decisions, this also goes hand-in-hand with learning new things.
Diversify
When it comes to investing, one of the most important things you can do is diversify your portfolio.
This means investing in a variety of different asset classes, so that if one investment goes down, you’re not wiped out.
Diversification is key to reducing risk and ensuring that you’re able to weather any storm.
Start Early
The earlier you start saving and investing, the better off you’ll be.
Compound interest is an incredibly powerful tool, and the sooner you start taking advantage of it, the better.
If you start early, you’ll be able to take advantage of compound interest for longer and really grow your wealth over time.
Safety-Net
You should always have at least 6-12 months of worth of your salary as savings in an emergency account that is accessible at all times in case of job loss or other unforeseen circumstances.
This safety net will help you weather any storms and keep you from going into debt if something unexpected comes up.
It’s important to have this security blanket in place so that you can focus on your long-term goals without worrying about the short-term.
Investments don’t count as emergency funds, make sure that you have a separate account for this and is in-addition to your assets and investments.
Pay Yourself First
When it comes to saving and investing, you should always pay yourself first, this principle should have come earliest in our list but none-the-less, is still in the list, perhaps once you understand the importance of our first 8 principles, you will appreciate this principle even more-so.
Ultimately, this means setting aside money each month to invest in your future, before you pay any other bills or expenses.
Paying yourself first is a great way to make sure that you’re always putting your future first and making progress towards your financial goals. Keep this to something that you can easily afford, something like 10% of your monthly salary would be a great start, Make sure to pay yourself 10% of your monthly earnings and use this money for your investments.
Pensions
Most employers will have a workplace pension, this is a pension that when you pay into each month, your employer will match your percentage in additional payments, up to a certain percentage.
All pension contributions are tax deductible, so if you are a high earner, you could effectively sacrifice your all your salary which is above any higher tax band and practically pay no tax on this money by paying the surplus into a pension scheme.
Although paying INTO a pension scheme can be tax efficient, remember, you will only be able to withdraw these pensions at a certain age and would be subject to income taxes if applicable based on your annual earnings.
Conclusion
Financial management principles are important to understand and follow if you want to be successful in achieving your financial goals and build wealth.
There is no one-size-fits-all approach to financial planning, but if you stick to a few key principles, you’ll be well on your way to financial success, you can use an online business database to search for one in your location.
If you’re not sure where to start, seek out a qualified financial planner who can help you create a personalized plan that fits your unique needs and circumstances.
A good place to start would be with these ten essential principles of financial management.
Make sure that you have an emergency fund, pay yourself first, invest early and often, diversify your portfolio, and don’t forget about pensions!
By following these simple principles, you’ll be well on your way to building a solid financial future.
What other financial management principles do you think are essential for achieving success?