Three Principles Of Personal Finance

I received an email from Mint during the week that made me think about the way I am handling my money now. The email contained the Three Principles of Personal Finance that we should all follow if we are looking at ways to save money and manage our finances better.

The Three Principles of Personal Finance are:

  1. Spend less than you earn.
  2. Make the money you have work for you.
  3. Be prepared for the unexpected.

Now I know that those three things are the same bits of advice that we see every day on all the personal finance blogs. I know that I have seen them so many times that I have grown tired of reading them and at times I have spoken about how it can be impossible to spend less than you earn in certain situations. The email made me think a bit because since I started blogging I have made some baby steps towards following those three principles, even though I was not consciously going step by step.

Spend less than you earn.

I had always wondered how I could spend less than I earn on a habitual basis because my rent is certainly not going to change right now. My car payment is still the same and I don’t think they would take too kindly if I asked them to pay less since I am currently upside down on my car loan .

I was trying to think of how I have been spending less than I earn recently and it came to me. The first thing that has helped is that I made a budget. I started off by looking at my old receipts and putting down what I spend according to those receipts. Fixed bills like rent obviously went into the spreadsheet as is because they were things that I could not change on a whim.

I then looked at things like food and clothing and tried to cut $5 from them every month. It has been working so far and I got the numbers down to where I have a positive balance when I deduct my expenses from my income. It was not an easy journey and I do have small lapses every now and then but the important thing is to keep monitoring what you spend.

Another way I manage to spend less than I earn is to only count on my salary as income. If I find money on the ground I don’t immediately go out and spend it. If I get money from a sponsor I don’t set it aside to have a blowout on new socks 🙂 .

I treat this money as a bonus or a nice surprise and leave it to accumulate in the checking account with ING. Then at the end of the month I will snowflake that extra money over to a credit card for an extra payment on my debt.

Make the money you have work for you.

I am making my money work by gaining interest on the money in a high yield savings and checking account. I currently have the bulk of my money in ING because they have great interest rates and are VERY easy to use. You can get a bonus $25 for opening a new account so why not get yours today? I get 3% interest on any balances in my savings accounts and get 1.74% on my checking account .

I also get 3.30% on a six month CD which is excellent for me since I do not have so much money that I can just have my money tied up for longer than six months at a time.

My money stays mostly in the ING savings account and then a set amount is transferred during the month to the Electric Orange checking account, where I have all my bills set up to be paid automatically. It is a good idea to have the money sitting in the the savings account until it is needed by the checking account since the savings account has a higher interest rate.

Of course I have a small buffer in the checking account in case there is some kind of mix up but for the most part the money only gets transferred a few days before the next set of bills are ready to be paid.

Because I have Electric  orange I do not pay for stamps or envelopes since the majority of the bills are paid electronically. If a lender does not accept electronic payments then ING sends them a paper check but I do not have to pay any fees for this.

Be prepared for the unexpected.

I am preparing for the unexpected by having an emergency fund. It is called my Never Go Back To Fresno Fund and although I had to use the money to fully pay off a loan , I am now building the emergency fund back up. It started small, with me putting in $2 a month into the savings account until it grew to now being $10 a month . I wish I could save some more but since I am working on aggressively paying down my debt, that is all I can afford to  put into a savings account right now.

While it is important to save it is also important to pay down debt and you need to be able to make the compromise between the two. My highest interest rate on income is 3.3% while my interest rate on credit cards and loans is averaging about 9%. It therefore makes more sense to focus on making my snowball payments and regular payments to debt to bring down the balances, while spending less time on increasing savings.

While the amount currently in my emergency fund is not enough to take care of any real emergency that could come up tomorrow I am glad that I have started the saving mentality and am better prepared to handle something unexpected. Realistically I will have to use one of my credit cards to handle an emergency in the near future, but it will be one of those cards that has a zero balance. I will then use the money in the emergency fund to pay the payments on the card as they come due, unless I can build up my emergency fund to an amount that can cover a true emergency.

I have been following the three principles in my everyday life and I am continuously working on getting better and better at this. Do YOU follow the Three Principles of Personal Finance?

What else do you do manage your personal finances?

Author: Lulu

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  1. One other thing I think is very very important when paying off debt is that you also need to be bringing in some more money!!!

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  2. Twiggers is right, earning extra money is one of the best ways to changing your financial situation. That’s not always easy though. There are some immediate things you can to do save like: driving less, eating out less, cutting off the cable, turning down/up the thermostat. Usually it’s easier to earn extra money than it is to change spending habits, unless you’re easily able to move.

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  3. @ Brad:
    I actually found it easier to change spending habits than to earn more money.

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  4. It never ceases to amaze me how most people, no matter how much or little money they make, can find a way to STILL spend more than they earn. You have to live on less than you earn, simple as that 🙂

    To Twiggers and brad – I have to disagree. The problem with earning more money is that you are treating the symptom, not the problem. How much you actually make, past a certain point (low middle class living for example), really doesn’t determine if you keep your head above water financially. I could make 1 mil but if I spend 1.1 mil, I am still a failure.

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  5. True Shawn..that is exactly what I was saying. Twiggers and Brad need to realize that it is not always possible to go out and earn more money.

    Easy to say but some people have restrictions. While it is the ideal to say go out and wait tables at night or something….what happens to those people who cannot do this because of visa restrictions?

    I am not saying it is not possible for any american citizen….but even then you might have citizens who have to take care of an elderly or sick relative who do not have the time to go out and work more.

    Or you have the foreign student who runs the risk of getting deported for working a second job….or the one who no one will employ because it is specifically written on the social security job that they are not eligible for work.

    What then?

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  6. The rules may seem simple and few.

    Discipline is the key. But if the school system were to start drumming these rules into our heads from day one, I am sure the whole world would be a far better place.

    And the Governments would make a killing in not having to provide for all the bailouts of the financially inept and providing for the financially strapped.

    But then which Government behaves rationally.


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  7. It’s all the small day to day things that you can do to save money. If you make small amendments to your life, you can still enjoy all the good things, but save money as you go along.
    Things like car sharing, wtching out everytime you boil the kettle, checking your phone and electricity bills, etc etc.
    I have a few ideas on my blog


    Canny Squirrel

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  8. Tracking your spending is the only way to make sure you are spending less than you are making. I use for that. And if you have a way to automatically have money taken from your paycheck before you ever see it, that is the best way to be sure you are paying yourself first.

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  9. I totally agree with your second bullet point, make your money work for you. I believe that many people know a great deal about their particular profession to earn income, but know very little about putting their money to work for them.

    How are some of you putting your money to work? I recently put some of my money to work by purchasing some Apple stock a few day ago.

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  10. @ Michael:
    Right now I don’t have money to put into the stock market but I am looking at it.

    I was looking at getting stock in Walmart since I always shop there..they might as well give me back some of my money right? 🙂

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  11. I think a lot of people are pretty good at making and saving money, but it’s easy to forget about “the unexpected”. After all, how do you plan for the unexpected?! It almost sounds like an oxymoron… Personally, I think about the most common things like: auto and home repairs, medical expenses, last minute travel, and misc business expenses.

    In addition to the “planned” unexpected events, I like to save about 2%-3% for an extra fund. Over the years I found that 2% is almost always used by something. It’s nice knowing I have that extra cash to use if needed, and it takes away the negative psychological effects when something does come up.

    – Chris Dunn

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