Financial Principles vs. Strategies
Financial principles form the foundation of any viable plan to obtain Financial Freedom. Sound financial principles are evergreen, meaning that throughout time those principles hold true and for the most change very little, if at all.
Financial strategies are the ideas and approaches we cultivate and utilize in order to make those principles a reality. Strategies change rapidly based on current economic trends and individual circumstances. Strategies can be as simple as no longer buying your daily latte, to incredibly complex investing schemes, and everything in between.
Learning, understanding and implementing basic financial principles is a must in terms of achieving financial freedom. Learning, understanding and implementing complex financial strategies is most definitely not necessary. More often than not, the very basics are all that are needed to make major gains.
Financial principles are far from complicated. At the heart of it they are comprised of some pretty common sense stuff.
Financial principles are also applicable to almost everyones situation, no matter how unique your individual circumstances may be.
Here’s 5 that every FF seeker should be incorporating into their plan.
1 – Plan for the Unexpected
In life an ideal approach is often to hope for the best, but plan for the worst. It’s no different when it comes to finance. Although we would all like our portfolio’s and financial stability to strengthen overtime, it’s hard to know what life has in store for us around the corner. Being prepared is the first weapon in any Financial Freedom seeker’s arsenal. Having a strong emergency fund can be the difference maker in your ability to weather the storm, both financially and mentally.
2 – Live Below Your Means
This is about as common sense of a concept as you can get. It’s just not that common. Though the majority don’t put it into practice, you really can’t argue with the hard math. If your cost of living (COL) is lower than your income, overtime you will steadily become wealthier. The speed at which that wealth will grow depends on A) how much money you make, and B) the difference between your income and your COL. Make more, spend less and your wealth will grow exponentially faster.
3 – Diversify
Diversification spreads out your exposure to risk. But don’t just employ this age-old financial principle when you’re considering your investments. It’s also ideal to diversify your income streams. If you can develop multiple sources of income you mitigate your reliance on any one job or investment. Which means that when something goes awry with one of your income streams your less likely to find yourself reaching for your emergency fund.
4 – Eliminate Debt
The more you can reduce outgoing payments and obligations, the lower your required COL. The lower you can get that COL number while maintaining (or increasing) your income, the faster you can achieve FF.
5 – Get Your Money Working For You
You do not have to be an expert financial planner to invest your money. You can invest conservatively in a variety of different options these days without exposing yourself to unnecessary risk or complex financial strategies. But the bottom line is your money should be working even when you aren’t. There is nothing more powerful in terms of building wealth than the marriage of compounding interest and time. Put your money away and allow it to grow. In twenty, thirty+ years the results will be substantial.
Where the world of financial planning starts to get complex is when you begin look beyond those financial principles to choosing the strategies that will support those principles.
This is where individual circumstances and personalties come into play and should always be factors in considering what will work best for you.
But the reality is the vast majority of people simply don’t have their ducks in a row when it comes to the basics. And until you have the foundation in order, why even waste your time worrying about how to approach the more complex?
It’s one of many reasons I suggest that most people focus on employing very simple strategies. Nothing fancy or earth shattering is required to make significant progress in your financial goals.
For instance, using a budgeting tool or spreadsheet to help you track and cut down on expenses. Creating a side hustle to bring in more income and diversify income sources. Developing a structured time line for debt repayment. All are very simple strategies that can make a significant difference in your bottom line.
So when you’re developing your plan for Financial Freedom, identify the financial principles you need to focus on. Identify at least three top principles you need to really dig into in order to make a big impact on the viability and timeline of your plan.
Once you have those principles identified they will act as your guideposts in looking for, and choosing the financial strategies you should employ. Doing so will focus your efforts helping you keep your eyes on the principle, and avoid getting lost in the minutia and complexity of the vast world of financial strategies.