A few important principles are all you need to use your money wisely.
Image source: Getty Images.
Personal finance can be a complex subject, and it's easy to get overwhelmed with all the information that's out there. You could spend hours reading about how to handle money, with little to show for it after.
But money matters don't have to be so complicated. There are a few key principles that can make or break you, and if you want to build a strong financial future, then you need to know them by heart.
1. Spend less than you earn
This first principle is by far the most important. The only way you can be successful is by having more income than expenses every month.
By spending less than you earn, you can put money away for the future instead of living paycheck to paycheck or sinking deeper into debt because you can't pay your bills.
One popular piece of advice is that you should save at least 20% of your income in a high-quality bank account. That's a smart goal for most people, but if you can save even more, you absolutely should.
2. Maximize your income
Although it doesn't get talked about enough in the world of personal finance, increasing your income is the best way to save more money, rather than pinching pennies.
The amount you can save by reducing your spending is limited. Sure, you can make cuts here and there, but that doesn't work forever. Eventually, you'll reach the point where there are no more cuts left to make.
Instead of trying to budget your way to being rich, you're much better off looking for ways to make more money. Negotiating a raise, finding a higher-paying job, freelancing, or starting a business on the side are all ways you can bring more money in.
3. Plan for emergencies
Emergencies are a fact of life. If you're not ready for them, they can cost you a lot of money. There are two ways to prepare for emergency expenses:
-
Putting money into an emergency fund
-
Making sure you have all your necessary insurance coverages
Your emergency fund is the money you'll use for any unexpected bills that come your way. Ideally, you should have three to six months of living expenses in your emergency fund. It takes some time to save that much, but any money you save is better than nothing. Get your emergency fund started by opening a high-interest savings account and depositing whatever you can manage every month.
People often skimp on insurance, only to wish they hadn't when they get hit with a huge bill later. At a minimum, you should have:
-
Health insurance
-
Renter's or homeowner's insurance
-
Auto insurance