When it comes to finance there are lots of different principles, calculations and figures which people believe to be important. As a result, it can be hard to know which ones actually are or not, as well as what they are and what they mean.
Therefore, I thought it would be a good idea to share what I believe to be some of the most important principles/concepts when it comes to your finances. You may have heard me mention some or all of these, but this is a good reminder. They are not necessarily in a particular order
1. Pay future you first
This concept is that when it comes to attempting to build your capital, you should set money aside for this (and preferably automate it) before you then allocate the remainder of any income. It can be more powerful and create greater discipline than attempting to save what is level at the end of the month.
2. Know what you own (and why)
Knowing where your capital is and what the purpose of it is highly important and can give much greater clarity and confidence. Going a level deeper, understanding what underlying investments you hold even if only at a high level can also build this confidence.
3. The power of compounding growth
Albert Einstein described compound interest as being ‘the eighth wonder of the world’. But what is compounding when it comes to finance – effectively it is obtaining growth on growth which then snowballs up into significantly more growth over long periods of time. It is often one which is misunderstanding. It is important to note that the compounding impact can also happen in a reverse manner when it comes to losses.
4. Time in the market
This concept is that it is much more important to be invested and then remain invested in the market rather than attempting to time to perfect opportunity to buy in and then attempt to move in and out of the market depending upon financial markets. If you would like to see detailed examples of this then get in contact.
5. Diversification
Most people have heard the phrase ‘don’t put all of your eggs in one basket’, but this is the every day version of diversification when it comes to wealth creation and wealth preservation. Essentially the more diverse a portfolio is, the less of an impact any one individual holdings can have – whether that be asset classes, geographies or underlying holdings.
6. Behaviour Beats Excellence
Taking action to begin with but then having the discipline to maintain the correct behaviour often makes much more difference than selecting the perfect solution for them. Over the years I have met plenty of people who have been seeking extreme certainty and conviction before proceeding with what would be considered simple and common-sense decisions, particularly when starting out.
7. Rule of 72
This is a generic but nevertheless useful barometer relating to saving and investing. By dividing your expected/hoped growth rate by 72 you can understand how long it would take in years for your money to be doubled. For example, a growth rate of 7% per annum would take 10.28 years to double the money (72/7 = 10.28).
8. Risk and Reward Are Linked
This would seem to be an obvious statement, but yet something that people often forget when it comes to managing their finances. It would be lovely if this were not the case, but is always an honest conversation to have with individuals whenever reviewing their portfolio about how it should be allocated moving forward.
9. Pound Cost Averaging
This is the principle that by making regular contributions you have multiple purchase price points, which is thought to help smooth out the short term fluctuations in prices over time.
10. Beware of Inflation (the Silent Killer of wealth)
Whenever it comes to personal finances, this is one of the most important elements for us to include and reference. Inflation is simply the tendency for prices to rise over time and so therefore it is important for your wealth to reflect that and reference the performance of it against that as a basic measure.
Hopefully you find these ideas useful when it comes to thinking about your finances.
Please note investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.
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