4 Financial Principles to Building Wealth that Every Person in their 20s Should Follow
Personal finance and wealth creation can be a complicated subject, and one can get easily overwhelmed with all the information that’s available. You can spend hours listening to personal finance podcasts and youtube videos and reading books, yet you still have nothing to show for it afterward.
Money matters don’t have to be complex. The first step to succeeding in the world of personal finance and wealth creation is to set clear principles. Principles are fundamental truths that will guide your reasonings and actions when dealing with money. Once your financial principles are set, then money matters are simplified. Here are a few key principles that can set you up for financial success.
1) Don’t Put All Your Eggs In One Basket
Everyone has heard the age-old saying “Don’t put all your eggs in one basket”. This is a piece of advice which means that one should not concentrate all efforts and resources in one area as one could lose everything. This life principle holds true in the world of personal finance. Many people have all of their money in one bank account. This is dangerous because by human nature we desire to satisfy our wants first without prioritizing bills, debt, savings, and investments. By putting all your money (eggs) into one bank account (basket), you could potentially lose everything and never reach your goal of financial freedom.
I have found that utilizing multiple bank accounts helps me to stick to a budget easier. By compartmentalizing my money, it helps simplify keeping track of it. I have five bank accounts which are three checking accounts and two savings accounts. Below are the list of my 5 different bank accounts and the purpose they serve:
- Spending Account — USAA Checking Account
- Bills Account — Chase Bill Pay
- Investment Account — Bank of America Checking Account
- Emergency Savings Account — Marcus by Goldman Sachs (High Yield Savings Account)
- Goal Savings Account — Qapital (Mobile Banking App)
To manage these accounts, I highly recommend a mobile app for you called Personal Capital. Their free software automatically tracks the performance of your income-producing assets, including monthly cash flow, annual return, and even free fee analysis. This app can monitor all of your bank accounts on one easy to follow dashboard.
2) Automate Everything
How much time do you spend managing your finances? The day to day activities such as paying bills, transferring money from one account to another, and investing can take much of your time. It’s important to build an automated system to handle your money so that you can focus on the bigger picture which is making your money make more money. Below is a diagram of an automated personal finance system:
An automated system can be built using many of the major banking institutions today. The system is flexible so you can tweak it to your specific needs.
3) Use Your Money To Make Money
For you to reach true financial independence, you need to have your money work for you — not you for it. If you are having trouble understanding where to start, I have written an article entitled “4 Low-Cost Income Producing Assets That Generate Passive Income which Anyone Can Do” to help you get started. The top ways to make your money make more money is to invest in a 401K or IRA, micro invest on a platform such as Acorn or Qapital, purchase a rental property, or invest in currencies such as FOREX or cryptocurrency.
4) Live Below Your Means
To live below your means, you must not spend more money than you earn. I saved this principle until the end intentionally. This is the hardest principle to live by, especially for people that love to spend money like me. By following the first three principles: separating your money into different bank accounts, automating the movement of your money, and utilizing your money to make money, it is more feasible to live below your means. This principle does have a key characteristic. To live below your means, you must keep your expenses low. The largest expenses most people have are housing (mortgage or rent), transportation (car note and insurance), and food. By figuring out how to decrease these expenses, one can be further down the narrow path of financial independence.
While these principles might sound like common sense, the real trick is to truly understand them, and more importantly, to apply them.
