Money Rules to Improve Personal Finance

The term financial literacy can be quite confusing because finance itself is a complicated subject. However, financial literacy involves a couple of simple things, one, you need to learn how to manage money, managing money means you spend less money than you are earning, thus being able to create a surplus amount. Financial literacy also means the ability to use money properly. Using money properly means you manage to save money regularly and you also manage to invest money regularly. You might be earning a lot of money but if you do not know how to manage it, you will always be in financial trouble.

2 Non-Negotiable Money Rules

If you want to become financially successful, here are 4 money rules that you should know and also apply in your life

Rule No. 1.

Money is always attracted to positive people. Have you seen any pessimistic people who are very rich? If you listen to rich people, you will find that they always have a positive mindset.

Rule No. 2

If you cannot afford to pay the loan do not take a loan. If you get a loan with a belief that the business you start with your loan will help you pay back, do not take the loan as this is not always going to work out. Also, do not get a loan to buy things that do not give you financial returns.

The Rule of 72 in Personal Finance

The Rule of 72 is a simple rule that tells you when your money is going to be doubled. This rule also tells you at what percentage should you invest your money so that it doubles in a certain time. Let me exemplify.

Let’s say you have invested your money for a 12 percent annual return. According to the Rule of 72, you will have to divide 72 by 12 (interest rate). The result will be 6. So, your money will double in 6 years. If you invested 10 percent, your money will double in 72/10 =7.2 years.

If you want to calculate when it is going to be 3 X, instead of 72, try 114, and if you want to find out when it is going to be 4 X, use 144.

Power of Compounding to Improve Personal Finance

Let’s say you invested in Tesla stocks when it was $500 and when the stock reached $700, you sold your stocks. You made profits from this investment. What are you going to do with this money? If you spend it, will you be able to improve your finance? Certainly not, you need to continue to reinvest. The better approach is to reinvest all the profits you received from your Tesla stocks. This is called compounding. When you are reinvesting your profits and building your principal amount (number of stocks in this case), you are basically compounding your profits. 

There are a lot of benefits of compounding and the most obvious one is it will help you build your portfolio. Since you are reinvesting your profits, you are building your investment.

The second benefit of compounding is you will be able to build your wealth. Your worth will be more when you start compounding.

When you compound, you do not have to invest from your pocket. You are basically investing the money you made from your previous investment.

Compounding will also help you to become rich. Since you are always reinvesting, your wealth will continue to build and in the long run, you will become rich.

Conclusion

There are three reasons why people have difficulty in managing finances, one, earnings are terribly low, two, expenses are very high, and there, is a lack of money management skills. First and foremost you should start saving. When you save, you will have money during emergencies as well as will be able to invest to build wealth. If your expenses are high, communicate openly and regularly about money matters in your family and try to cut all unnecessary spending. Avoid debt and pay off any existing debt. YOu can avoid debt if you keep your expenses low and save more.