Three Basic Financial Principles Everyone Should Follow
I was asked by a friend recently what essential financial advice I would give to a stranger. I had to think for a few minutes, but eventually, I came up with this article's three basic financial principles. I’ll explain why I chose these three principles below, but it essentially comes down to being financially free and wealthy. If you want to be financially free and rich and don’t know where to start, this article is for you.
Principle #1 — Pay yourself first
The first principle is the most basic, and it makes sense if you say it aloud. PAY YOURSELF FIRST. That’s it, easy, right? Well, unfortunately, that is not the case. Even though we trade our time for money, most people do not follow this basic principle. Instead, when payday arrives, we view this as the perfect time to buy that gadget that we think we need, buy those new clothes we want but don’t need to look good for that Wednesday Zoom meeting, or spend money eating out when our fridge is full of perfectly healthy food. We think with our emotions regarding money, rather than our heads. Doing this will lead you to financial turmoil, one day looking back and wondering why it took you so long to see this.
If you follow Principle #1, at the end of the year, you will have at least one bank account with a positive balance. It might not be much, but it is a start in the right direction; sometimes this is all we need. There is more in-depth information that coincides with the first principle, but we will touch on that in a later article. For now, focus on paying yourself first.
Principle #2 — Spend less than you earn
The second principle we should follow is simple, spend less than you earn. As you were reading this, I bet you thought “really, everyone knows this.” Well, everyone may know this, but according to a study conducted by Manulife Bank, which surveyed 2001 Canadians in all provinces between the ages of 20 and 69 with a household income of more than $40,000, found that nearly half spent more than they earned, and spent it faster than it came in[1]. So yes, it is a simple concept, but as you can see, a large portion of the population doesn’t follow this simple principle. How can this be? Well, I would argue that this has to do with the first principle, we don’t pay ourselves first. We would rather spend our hard-earned money to other people for goods and services we don’t need, just want. See how these basic principles work together; they go hand in hand, just like your money goes from your hand to someone else’s.
Michael Scott said it best in “The Office”; keep it simple stupid (KISS). Money doesn’t need to be over-complicated; it’s simple math. You get paid $1000, and you spent 1200 dollars; you now have -$200 and are in debt. You need to take accountability for your money and actions and SPEND LESS THAN YOU EARN.
Principle #3 — Start Investing Your Money As Soon As Possible
The final principle is fundamental. Start investing your money as soon as possible. The sooner, the better, as with some things, time is your friend here. The sooner you can start investing in a TFSA, RSP, mutual fund, index fund, or stocks, the longer you give your money to grow and become the millions we all hope and dream for. Except this isn’t desiring or a dream; it's reality.
How will investing my money earlier in my life lead to financial freedom Well, the financial world has a beautiful secret, compound interest. In layman’s terms, compound interest means you gain interest on your money’s interest. The longer your money is collecting interest on its interest and growing, the larger your pool of money is when it’s time to retire. When retirement comes, you will appreciate all those extra years you allowed your money to compound and grow as you see those millions sitting in your bank. I’m not BSing you, it’s that simple, and you have compound interest to thank.
If you are looking for some great resources to get started on DIY investing, then look no further than the Canadian Couch Potato’s [2]model portfolios (it is straightforward and has complete guides), or if you live in the US, then NerdWallet [3] has a good beginners article for anyone in the US.
Hopefully, this introductory financial principles article was helpful to someone in need, someone just starting their financial path, or someone who just wanted something easy to read. I’ll post articles weekly and dive deeper into basic and advanced financial advice. These three basic principles are a great start and something to think about. As Brian Herbert once said,” The capacity to learn is a gift, the ability to learn is a skill, and the willingness to learn is a choice.”
- Dean Louis — Lucrative Advice
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References:
[2](https://canadiancouchpotato.com/model-portfolios/)
[3](https://www.nerdwallet.com/article/investing/how-to-invest-in-stocks)
