I know you’re probably a high school or college student looking for answers to your test, but if you have a moment, I’d like to teach you something things that influence how you view you finances.
In essence, there are no five core universal foundations of finance. Your textbook might say there are, but these are merely suggestions written by a blogger like me or financial educators and advisors like Dave Ramsey lol.
Some books have defined foundations in personal finance as:
- Pay cash for your car
- Build wealth and give to others
- Have a budget and stick to it
- Set goals for your financial future
- Utilize insurance to protect your assets
- Avoid lifestyle inflation etc.
For college students, or anyone below the age of 24, the five foundations of personal finance could be:
- Spend less than you make
- Emergency fund of 3-6 months of expenses
- Save and invest your money (compound interest is killer)
- Manage your debts, expenses, goals via budgeting
- Continue improving your financial literacy
However, I would like to also offer you five emotional or “holistic” foundations of personal finance:
- Embrace financial mindfulness
- Self-compassion
- Seek support in your finances
- Use money to amplify or remove values
- Celebrate milestones
You can read more about them in this article.
Again, these foundations are aimed at affecting your finances beyond your bank account. They aim to change your ideas and attitudes around money.
Let me explain the five regular ones.
Again, the ones listed by other sites or Dave Ramsey are great and important and useful and amazing. However, they’re kinda boring.
What do they mean? What do they look like?
1. Spend less than you make
You make $19 an hour, work 35 hours a week, for a total of $2,660 monthly (without taxes).
For no reason ever in your entire life should you be spending $2,660.01 or more. Never ever ever ever ever. And if you find yourself spending more than this, you may be making too little (but you already knew that) and you need to lower your expenses, find a side hustle, or form a union to demand equitable wages.
Spending less than you make is also a protective measure. Credit cards, Afterpay, and borrowing money from friends is a form of debt. They often cost more money (which we agreed you already don’t have) and may even cost you friendship or relationships and overall more stress.
2. Emergency fund of 3-6 months of expenses
What’s an emergency fund? An emergency fund is the money you set aside in case you have an emergency. If your car breaks down, your phone crumples into oblivion, you get fired at your job or URGENTLY need to leave for your mental health, this is the money that you go to.
This is the money you use to avoid getting into more debt which would theoretically make those already sucky events more sucky.
Like if your car breaks down, this suck and there’s a ton of cortisol flowing and now yo have to coordinate with a million people, and this event makes you have the worst day and possibly the worst week, you do not want to add to the stress by having to ask your mom, grandma, friend, or worse, Chase, aka your credit card for money.
Because at least if you ask grandma, she’ll give you terms and a reasonable interest rate if any, whereas Chase will ALWAYS say yes but will bum f*ck you later with 27% interest rate and you’ll spend MONTHS paying possible twice as much.
If you’re in high school, I recommend $500, if you’re in college, closer to $1000. And then if ever possible, aim for 3-6 months of expenses. Check out this video for help calculating your emergency fund.
3. Save and invest your money (compound interest is killer)
Saving, I am not gonna get into it because we all know we need to save money.
However, investing. That is where the magic happens. The excitement. Joy. The stock market is where dreams come true.
The most important things to know about investing are:
- Invest and hold. Don’t get caught in the smoke and mirrors known as trading. Investors are looking for long term growth whereas traders look for short-term profit. There isn’t necessarily anything wrong with trading, joweever, most people get burned and you don’t wanna play around with money that you’ll need when you’re 80.
- Don’t invest money you can’t lose. This is for you today. Again, investing, you’re playing the long game and this money isn’t meant to take care of you today. So, if you need it, don’t invest it.
- Index funds. Index funds. Index funds.
Bonus, for all you social justice warriors, environmentalists, or anyone who wants ot make a positive change in the world, investing is still for YOU.
All buying stocks means is that you’re buying ownership in a company. When you get ownership, as an owner, you get to make housekeeping decisions on how that company runs. This happens through a board of directors who then make decisions on how the company is running but you can read (or watch) more about it here.
4. Manage your debts, expenses, and goals via budgeting
Budgeting is just determining what you will spend your money on and tracking what you have spent your money on in the past. It’s often as simple as writing these expenses on a sheet of paper, using a spreadsheet, or even an app.
Some expenses are fixed, such as your phone bill, car insurance, rent, loan payments, and investments .This means they don’t change. Your expenses may also be variable such as groceries, gas, repairs, fun money, and savings (often after paying expenses) meaning they vary from month to month. The extent to which you want to track those is up to your comfort level. Check out this article for more information on budgeting and tracking daily expenses.
5. Continue improving your financial literacy
Much like reading books in grade school, you must continue improving your knowledge on financial topics as your financial situation will continue to grow more complex as you take on investing outside your retirement accounts or wealth transfers in your family.
You can do this through YouTube videos, podcasts, articles, and even Instagram.
Pay attention to a person’s credentials and experience that determine their financial education. For example, anyone can call themselves a financial advisor, but someone with the CFP credentials is a certified financial planner who’s taken 1-2 years of classes, a rigorous 5-6 hour exam, and 4,000-6,000 hours. They’re also required to be a fiduciary, or someone who acts in your best interest rather than selling a product that pays them the best.
Conclusion
In conclusion, the five core principles of personal finance don’t really exist. Bloggers and financial professionals may focus on different areas but there are no universal principles. This is a good thing because it means that you can change your core principles are you learn more about money.
Whatever your five foundations of personal finance, practice them with mindfulness, self-compassion, and joy to help maintain a financially fulfilling life.
