8 Core Personal Finance Foundational Principles To Follow For Success

Personal finance is a broad and complex topic. However, there are a core set of personal finance foundational principles that you can follow that will produce 80%+ of the results.

It is easy to get caught up doing small and insignificant items that don’t improve your personal financial situation. And if you focus on the small items, you don’t have time or mental capacity to work on the big ones.

Follow these 8 personal finace foundational principles and you will be well on your way to success.

The 8 Core Principles of Personal Finance

There are many things to learn on your personal financial journey. However, if we had to choose the most important steps you should take today, these would be the 8 areas to focus on. Once you achieve the following 8 items, you should continue to expand your personal finance knowledge.

But doing these 8 will get you at least 80% of the way to your goal.

These are the ‘big rocks’.

The 8 core principles of personal finance are:

1. Make a budget
2. Set an emergency fund
3. Pay off bad debt
4. Get life insurance (and will & trust)
5. Save and invest at least 20% of your income
6. Invest (primarily in low-cost ETFs)
7. Automate everything
8. Increase your income

Note – “The Big Rocks” Paradigm

Many of you may be familiar with the concept of ‘big rocks’. But for those that aren’t, it is a method to direct your focus on the most important items first. It was introduced in a video taken from a seminar where the speaker has a women try to fill a bucket with rocks, gravel, and sand.

The first time he has her start with sand and gravel and then try to fit the big rocks in. Clearly, this doesn’t work. After the gravel and sand, it is impossible to get all the rocks to fit.

The big rocks represent the major items while the gravel and sand are the smaller less impactful ones. By starting with the small items, you take away from the ability to get the most impactful items done.

The speaker then has the woman try again with the same sized bucket, but this time start with the big rocks. When you pour the sand in last, you are able to make everything fit.

The takeaway is to start with the big and impactful items, then work on the smaller less impactful items with the remaining time.

It is a useful paradigm to use in all areas of life. Including in personal finance where you start with the most impactful financial changes first and then work towards the smaller, nuanced items. The 8 core principles here are the big rocks.

You can watch the video from Franklin Covey here.

1) Make A Budget

A budget serves two purposes: 1) Informs you of where you currently stand, and 2) it allows you to make a plan.

If you don’t have a budget, you don’t know where your money is coming and where it is going. Even if you think you have a good grasp of your finances, you will be shocked by what a budget can help you uncover. Nearly everyone we have ever worked with had at least a few expenses that were draining their funds that they didn’t realize. Maybe it is overspending on dining out, old unused subscriptions that were still being paid for, or a vice that got a little out of control.

To make a budget, you need to start with a minimum 3-month look-back. You pull all your bank, credit card, and financial statements. The first time you do this, it can be a bit time consuming, but updating a budget can be done in as little as 20 mins a quarter.

Once you have all your statements, you organize your spending and income into categories. Making a budget is on top of the personal finance foundational principle list due to how impactful it is.

2) Set An Emergency Fund

Having an emergency fund is crucial. Emergency funds are money that is liquid and safe that you can access on short notice to cover an emergency. Nearly 40% of Americans would be unable to pay for an unexpected expense of $400 without taking on additional debt, per the Federal Reserve.

Even further, you want a reserve in case you lose a job or face a health incident.

At a minimum, you want to establish 3-months of living expenses as an emergency fund. This should be put in a separate high-yield, FDIC-insured savings account from your other money.

Three months of expenses is a good start, especially if you haven’t done the other items on this list. But overtime, you may want to increase your emergency fund. A 12-month fund gives you significant freedom for handling most expenses life throws at you. This is a good long-term target for many, but may be overkill if you have other less liquid money you can access.

[Professor B.T. Effer Note on bank accounts:

Since you only touch this money in an emergency, you don’t need the features that a brick & mortar bank provide. There are many all online banks that have very high interest rates on accounts. By not having physical locations, they are able to pass the money saved on to customers in the form of higher interest. Often these accounts are 1% to 3% more than you will find at traditional banks.

Secondly, you want to have a separate account just for your emergency fund to separate the money so you aren’t tempted to spend it or accidently spend it. You should set-up a reoccuring transfer or deposit into this account to ensure it is growing and keeping up with your cost of living.

Lastly, make sure it is a liquid account (you can withdraw at any time) and FDIC insured. You don’t want your emergency fund in a locked-up security like a certificate of deposit (CD) where you pay a penalty if you withdraw early. FDIC insurance covers you from any losses if the bank goes bankrupt, up to $250,000.]

3) Pay Off Bad Debt

Bad debt is like an anchor weighing down your personal finances. Every month you are accruing high interest that is eating away cashflow that you could use to advance your financial situation.

Bad debt is mostly high-interest debt you may have. For example, if you are paying interest on a credit card balance, that is bad debt. Most credit cards have 20%+ APRs. Paying off this debt is the equivalent of earning a 20%+ return on your money. You want to get rid of this debt as fast as possible.

Other forms of bad debt include high-interest personal loans (often 10%+ APRs). Or if you have a poor credit score, you may have other high-interest loans for cars or student loans.

If you are unable to pay off your bad debt immediately even after budgeting, you may want to consider a balance transfer. Alternatively, you could use our improved method of transferring balances, the “Purchase to Transfer ^TM” method. The Purchase to Transfer TM method can save you $1,000s while you work to pay off the balances.

4) Get Life Insurance And Secure End Of Life Plans with A Will & Trusts (Especially If You Have Dependents)

Life insurance can be confusing and complex. But it is one of the best ways to protect your loved ones if you unexpectedly die. If you have a family or dependents, it is imperative that you have life insurance coverage. This is why life insurance is the main product under the ‘protection’ category of the 5 pillars of personal finance.

At its core, life insurance is simple. You pay premiums to the insurance company, and if you die while the policy is active, the insurance company will pay the death benefit to your named beneficiary.

If you have no life insurance currently, you should start with a low cost term life insurance product. You likely should revisit your life insurance needs later, but when starting out, buying term and investing the difference (BTID) is an ideal initial strategy.

You should have a minimum of 10x your annual salary worth of coverage. Therefore, if you make $50,000 a year, you would need $500,000 of term life insurance immediately. However, there are much better ways to calculate your life insurance needs. Our preferred method is the DEEM ^TM method. DEEM method ensures all your debts and the future cost of living of your loved ones is cared for.

Additionally, you want to meet with a lawyer who specializes in wills and trusts. By properly setting up a will and trusts you can keep your state out of probate court. Not only is probate expensive, but it slows down the time it takes for your dependents to access your money.

Trusts can allow you to set rules around when and how your beneficiaries can use and access the money you left. For instance, if you have young children, you may not want them to get a big windfall when they are too young to use it. A trust will allow you to set rules around how much and how quickly they can access the money you leave.

This meeting likely won’t take more than an hour and cost a few hundred dollars. But it will ensure a much smoother transition of money and be well worth it if it is needed.

5) Save & Invest A Minimum of 20% of Your Income

There are a lot of saving and investing rules out there. A commonly used rule is the 50/30/20 rule which states you allocate:

• 50% of your budget to pay for essentials like home, car, utilities, and basic food
• 30% of your budget pays for your discretionary expenses
• 20% of your budget goes towards savings and investing

Overtime, you want to increase the percent of money you are saving, but initially 20% is a sufficient target.

As you are building up your 3-month emergency fund, the money that goes there counts as part of your 20%. However, to increase your wealth overtime, you likely need to invest in higher risk but higher return products like stocks.

An easy way to start investing is through your employer’s 401k plan and payroll deductions. As a bonus, many employers will match some of your contribution. A common match is 4% on your first 4% contribution. This is ‘free’ money that your employer will add to your 401k.

You can also open a Roth Independent Retirement Account (Roth IRA) and a taxable brokerage to invest through.

6) Invest (In Low-Cost ETFs)

For most investors, trying to pick individual stocks leads to underperformance.

The average investor tends to purchase ‘hot’ stocks that have gone up in price (FOMO or fear of missing out buys). Then when the stock price comes down they sell it near the lows.

Over nearly every long (20-year) period, the average investor underperforms a buy and hold strategy.

Exchange Traded Funds (ETFs) that are broad market and low-cost allow you to get diversified investments and pay low to zero fees. High-fees are a drag on your performance.

Broad-market ETFs, like the S&P500 Index ETF, will track the overall stock market. This allows you to invest, grow your wealth, but not spend time analyzing stocks.

If you are able to make reoccurring purchases of an ETF in your investment account, you will dollar-cost average over time. This minimizes market-timing risk and is beneficial for most investors.

7) Automate EVERYTHING

Your goal should be to make all your personal finance decisions as automated as possible.

What is the best way to save 20% of your income?

Make your 401k contribution 20%. That money comes out of your paycheck before you even see it in your account. Now you base your budget and live on the money that’s leftover. There is no thinking and little temptation to overspend it.

In fact, in order to save less than 20%, you need to make multiple steps to do it. First, log-in to your 401k or call your administrator. Second, change your contribution rate. Third, wait the pay-cycle or 2 for the change to go into effect.

What is the best way to contribute to an emergency fund?

Have a separate high-yield savings account at an online bank and split your direct deposit so some money goes to this account. Don’t download mobile apps for this bank account. Having an online bank with no convenient ATM to withdraw and where you need to log-in on a computer makes it less likely you casually raid your emergency fund.

What is the best way to increase your savings as you get annual raises?

Most 401ks have automatic contribution increases as an electable option. Elect for your contribution rate to increase 1% per year so you don’t need to think about it. Each year you are contributing a higher percent of your salary to your retirement automatically.

You get the point.

Even when it comes to paying bills, we recommend you set up a separate bank account for your essentials (mortgage, car loan, student loan, etc). This account is only used to get enough direct deposits to cover those fixed loan payments. If your combined mortgage, car loan, and student loan payment is $1,500 a month, deposit $1,550 into the account each month with direct deposit. (The extra $50 is to build a buffer over time).

Now you can have automatic bill pay and not have to think about these unchanging payments. Less mental capacity is spent on these items so you have more to spend on impactful financial decisions.

In fact, if you do the above 4 automations, you would be hard-pressed to not wind up in a successful financial situation. That is the power of automating.

8) Increase Your Income

This could and should be #1 as it can be, by far, the most impactful. But we will say we saved the best for last.

(Also, we may have fibbed a bit in #7. The best way to save 20% of your income is to make significantly more income. If you live on $50k a year, but only make $55k after-tax, it is hard to save 20%. But if you make $250k after-tax, suddenly you have a lot of excess income you can save.)

We firmly believe that making more money always makes your personal finances easier. Instead of spending hours a week clipping coupons, driving around for sales, and checking out numerous thrift stores to be frugal, you should focus on increasing your income with that time.

It can be picking up work hours, finding a better paying role, or starting a side income/job. Whatever the path you choose to make more money, it is often the path of least resistance to financial security.

This extra money isn’t for spending though, it is for increasing your savings rate. Eventually you want to own enough cashflow-producing assets that your investments can cover your cost of living. At that point you have reached financial freedom.

The Final Word: Personal Finance Foundational Principles

This post covered 8 personal finance foundational principles. Doing these 8 things will put you years ahead of your peers. However, there is still much more to do. After tackling these 8 items, you should continue to grow your understanding of finances. Examples of topics to learn include:

• Time Value of Money
• How Much Life Insurance You Need
• Optimal Life Insurance Strategies
• How To Improve Your Credit Score
• Car Buying with the 20/4/10 Rule

Keep reading Your Finances UnFukt as we will provide all the material you could need to be a personal finance wiz.

That is our goal for you.

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