10 Basic Principles of Financial Management You Need to Know

Whether you do all the work yourself, there are some basic money principles to be adhered to. It is also necessary to have answers to the following questions. What do you know about money? Do you understand money? Do you have a philosophy about how you use your money?

Experts say many people have little understanding about money; consequently, their finance are never in order regardless of how much money they have. Below are simple money rules that you need to know.

Differentiate between needs and want: Many people end up spending their fortunes on things they do not need. According to experts, everything that people really need revolves around foods, shelter and clothing. They stress that a key aspect of financial planning is the ability to differentiate between needs and wants. 

Unfortunately, they say many people fail to do so. While it is true that in today’s world many items, besides basic needs, are necessary, the decision to have your house fitted with classic painting by great artists at great expense definitely falls under wants. And they are many more examples like that. 

Even when people go for their needs, their decision is often informed by their want. For instance, while you need a bed to sleep in, you do not need one that has gold engravings or fitting all over. Many people spend money that way, on the things they want, believing that they are getting things they need and this can be a costly mistake because it amounts to money going to waste. To spend money wisely, always distinguish between wants and needs then go for the needs and ignore the wants.

Do not spending all your earnings: While this is self-explanation, many people find it impossible to spend less than they earn. But for you to keep your finances in order and to avoid getting into debt or running out of cash before the next pay day, if you do not spend all that you earn each month, you will have some cash to either pay off your debts or save. Now, the benefits of having some form of saving are numerous. Saving can allow you to invest, resolve emergencies and ease the financial pressure you feel when you run out of cash before the next earnings. Of course, the economic situation in the country has left some people with barley enough to feed, but many people have risen above such a challenge by adopting drastic saving tips.

More money may not be enough: For many people, the solution to their financial challenge is more money. While some of these people may genuinely need more money, experts say some others have enough nut mismanage it because they are financial illiterate. They do not differentiate between their wants and needs; they adopt a lifestyle that results in spending more than they earn, etc. Take time out to determine which category of money user you belong to, and if you believe that more money is what you need, then you need to know that there will be a time when you will realise that you did not need all those gadgets, cars or personal houses. When that time come, more money will hold no appeal.

Plan for the unexpected: Despite your best efforts, you’ll face some unforeseen emergencies along the way. Morris urges, “Save enough money and stock up on insurance to be able to weather extended unemployment, accidents, catastrophic medical care, large car or house repairs, and natural disasters.” Increasing the amount of money you save when times are good can help you manage the cost impact of bumps in the road, making sure unexpected financial exposure does not derail your long-term goals and your family’s financial security.

Money decisions have costs: It is important to note that every money decision you make, there is a cost attached. This means that by deciding to purchase one item, you are giving up another. By bearing this in mind and weighing both options critically, you are more likely to avoid making a mistake. For example, if you have N1m and you are to choose between the car, you need to know that the car did not just cost you N1m, it also cost you a plot of land.

Organize your finances: Organizing your finances is the first step to creating wealth. Credit cards, bank accounts, personal loans, brokerage accounts, mortgages, car loans, and retirement accounts — track everything. Budgeting software can provide complete solutions to track all such accounts, make on-time payments, and more. Jeff Morris, a certified public accountant in Bethesda, Maryland, points out: “Once you enter your accounts and balances into budgeting software, you will be able to spend less time getting organized and more time making sense of your situation.”

Budgeting: This is another simple but highly important principle; however, it’s one that a lot of people underestimate its importance. Budgeting provides a pathway to the first tip mentioned of spending less than your earnings. With budgeting, you also have control of your day-to-day finances, prioritise expenses, plan better for your basic needs and even unexpected needs and also act as a check to spending unnecessarily. Never underestimate the power of budgeting.

Keeping records:
This is another money principle that’s highly important, but the lazy man sees this as stressful and unnecessary. Keeping records of your financial transactions gives you better knowledge of your financial life, and that in itself is a financial victory.

Keeping records of your financial transactions would enable you know how effective or ineffective your budgeting is and how to correct the loopholes. It would also give you a clue on what’s actually consuming a gulp of your money and how to minimise it. Basically, you understand your financial position better when you keep records, and it’s even dire that some business people don’t see the need for record keeping.

Develop yourself: For you to get the most out of your money, experts say it is important that you spend some to develop yourself, you need to spend money to improve knowledge and to acquire self-management and communication or networking skills, which will not only help you to grow but enable you to manage yourself, your health and finances better.

Don’t try to impress others: When you try to impress other people, you are likely to cause financial problems for yourself. Because not only is such a move capable of making you to live above your means, it is also likely to make you invest in items you do not need. For example, there are people who have gone out of their way to purchase cars, only to find out that they cannot maintain them. Some of them are forced to sell the cars at a loss. The advice is that you live beneath your means, and develop a saving habit and in the future, perhaps when you are in your late 30s, you might be better off financially.

Also, avoid borrowing money. Of course it is easier said than done, but by debt-free, you stand a better chance to taking control of your finances and planning for the future. According to experts, if you can just live within your means for some years, you will be able to achieve a high level of stability.

Understand risk: The key to understanding return on investments is that the more you risk, the better the return should be. This is called a risk-return trade-off.

Investments like stocks and bonds that have a higher rate of return often have a higher risk of losing the principal that you invested. Investments like certificates of deposit or money market accounts with a lower rate of return have a lower risk of losing principal. Since no one knows the future, you cannot be 100 percent sure any investment will do well. Morris explains, “If you diversify your investments, one can go sour without severe impact to your overall portfolio.”

Diversification is not just for investments: Find creative ways to diversify your income. Everyone has a talent or special skill. “Turn your talents into a money-making opportunity. Investigate ways to make money from home and launch a home-based business,” Morris says. The extra income can supplement your full-time income or even result in an exciting career change. Good financial management software can show you how even a slight improvement in income can positively change your financial profile.

With these money principles, you would be sure to have a better guide to making better financial decisions and living a healthier financial life.


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