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Sometimes the notion of personal finance principles is made complex when it doesn't need to be. I don't know if folks do it on purpose so you'll "need" their advice or if they just don't know how to keep ideas simple.
The object of the personal finance game is to manage your income in a way that increases your wealth and your happiness. Over the years, I've settled on following just a few core personal finance principles that move me toward that goal. These are the principles that guide my tactics, which we'll talk about in other articles. For now, let's talk about the four personal finance principles and how you can use them to make better financial decisions.
If you want to read deeply about where I got these ideas in the first place, look for books by Ludwig von Mises, Friedrich Hayek and others who follow the models of the Austrian School of Economics.
The Personal Nature of Value
Value isn't defined by price tags or market trends. What's valuable to you might not be valuable to someone else, and vice versa. This subjective nature of value comes to play in every financial decision you make. This is why two parties to a transaction should both come away thinking they got the better part of the deal.
Image by leonardovieira260998 from Pixabay
If I'm buying a hamburger, I personally value the hamburger more than I value the money I have to spend to get it. The owner of the hamburger wants the money more than he wants the hamburger. Buying the hamburger leaves me feeling happier than when I only had the money and the restaurateur is happier having my money, which should represent a profit to her. We both think we got the better end of the bargain – and we did.
Application: Before making a purchase or investment, ask yourself, "Does this really add value to my life?" Don't be swayed by what others think is valuable. Choose based on your personal goals and circumstances.
Individual Decision-Making Matters
Your life and your financial path are uniquely yours. Learning is good and getting advice is good, but in the end your financial decisions are yours and yours alone. They should come from your judgement about your circumstances and your goals about where you want to be. Don't let family, friends or anyone else persuade you about what you should value. They don't have your life, your circumstances, or your goals.
Application: Develop a personalized financial plan that aligns with your goals, risk tolerance, and life situation. Don't blindly follow generic advice or try to keep up with others' financial choices. In the end, you're the one that has to live with your choices.
The Importance of Time Preference
The biggest villain in my financial life has been my attitude towards immediate gratification. I usually made the choice for gratification now and let tomorrow worry about itself.
Horrible plan.
What I finally learned is that focusing more on long-term benefits plays a huge role in financial success. This preference for a longer time horizon has made a big difference in how and when I spend and invest. Understanding and managing your own time preference can do the same for your wealth-building journey.
Application: Practice delayed gratification.
Consider the long-term implications of your financial decisions. Are you willing to forgo some immediate pleasures for greater future rewards?
Skepticism Towards Centralized Planning
This one has always come pretty easily for me. Regulations, governments, and financial institutions play important roles in our financial lives. There's no avoiding it. But relying too much on centralized systems or one-size-fits-all solutions is risky. It's important to maintain a healthy skepticism of any advice you're given and take personal responsibility for your financial well-being. In the long run, nobody – no politician, financial advisor, or influencer cares as much about your finances as you do.
Application: Don't assume that government programs or financial institutions act in your best interest. They don't. Stay informed, ask questions, and take an active role in managing your finances.
Conclusion
By sticking to these four personal finance principles - understanding subjective value, making individual decisions, considering time preference, and maintaining healthy skepticism - you can develop a better approach to your finances. Mastering your personal finances is a project of continuous learning and adaptation. It's even more important than generating more income. These personal finance principles provide a solid foundation, but it's up to you to apply them in ways that best serve your unique financial goals and circumstances.
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