Principles are important because they give you a general rule that can be used to cut through all the complexity of everyday decision-making. By following principles you give yourself a framework for understanding the world and guiding your behavior that is less susceptible to the noise of a messy, fuzzy world. These 43 principles of finance are based on proven strategies and psychological frameworks. They are rooted in common sense, rationalism, humility, and human psychology. You don’t have to be a finance Ph.D or mathematical genius to win with money. In fact, such analyses can often be detrimental to long-term success. Instead, focus on changing your behavior and emotions when it comes to money. These principles will given you the direction you need for building wealth and financial success.
1. Spend less than you earn
This is the foundational lesson of financial success. If you earn $1,000,000 a year but spend $1,000,001 a year you won’t be as wealthy as someone who makes $40,000 but only spends $20,000.
2. Don’t try to time the market
Trying to figure out when the bull market is gonna end or when the market will bottom out is a losing proposition. Not only will you be hit with the fees of turnover, but anytime you’re out of the market you risk missing out on the biggest gains of the year. Academic research has shown over and over that randomly picking stocks is equally effective as hiring active fund managers. Instead, look towards broadly diversified index funds.
3. Stay in the market for a long time
Most of Warren Buffett’s wealth comes from the magic of compound interest and the fact that he has been in the market for a very long time. Once you understand the impact of time on exponential growth, you’ll understand the key to investment success is getting in the market and staying in it as long as possible. This lesson is best learned on your own. Google “compound interest calculator” and compare the difference in investing $10,000 for 20 years at 8% return vs 40 years. Start early and stay in for as long as possible.
4. Give your dollars a job
Every time income lands in your account, allocate those dollars towards a specific funding category according to your priorities. This way your spending reflects a plan, your priorities, and your values. This is the foundation of zero-based budgeting systems like YNAB (You Need a Budget).
5. Investing in low cost, low fee, low turnover, diversified index funds like Vanguard for many decades is the easiest way to retire a millionaire
While some people will never be satisfied with the average returns of index fund investing, if you want to get as close to sure-fire when it comes to building wealth, you need to invest in index funds. There is nothing else available to the everyday investor that comes as close to “guaranteed” returns over the long run as index funds.
6. A low fund expense ratio is more important than above-average returns
This relates to lesson 3 (“Stay in the market”). Above-average returns can be the result of non-repeatable one-off events that don’t guarantee success over the course of 30-40+ years. But getting your expense ratio as low as possible is a no-brainer when it comes to preventing fund costs from eating into the magic of compound interest.
7. Buying and holding during recessions is more important than chasing high returns
In his book The Little Book of Common Sense Investing, John Bogle, the inventor of the index fund, uses simple mathematics and the historical record to show that buying and holding during recessions is more important than trying to time the market relative to lows and highs. This is why investing success is more about your ability to keep your cool when everyone else is panicking and getting out of the market.
8. Don’t become house poor
Just because you get approved for a certain mortgage size doesn’t mean you should buy a house that expensive. If your living expenses are over ~30% of your income you could be severely hampered when it comes to building wealth. You’d be surprised at how many people come to regret buying a house and one of the top reasons is buying a house that’s too expensive or that comes with hidden costs.
9. Get out and stay out of debt
“Bad debt” like credit cards and expensive cars you can’t afford is detrimental to your ability to build wealth. Every dollar sent to the bankers is not a dollar invested in your future. Eventually, the interest will come to eat you alive and your income will be going to payments and not wealth building. Most experts agree the only “good” debt is a mortgage but principle 8 (“Don’t become house poor”) still applies.
10. Pay off your credit cards in full every month
Avoiding debt at all costs doesn’t mean you have to cut up your credit cards. So long as you pay them off in full each month, you can get a little cashback which is free money without having to pay any interest. This is also a good way to build your credit which makes it easier to get good mortgage rates. While it is possible to get by without a credit score, this might end up more of a headache than just exercising financial discipline with credit cards.
11. Do everything you can to avoid losing money
While all investment involves some amount of risk, if you are so leveraged that a bad series of events could wipe you out completely you are not set up for success. You want to create a sufficiently diversified “all-weather” portfolio through the right asset allocation in order to minimize your exposure to loss while maximizing your upside when things go well. A diverse portfolio of index funds is an excellent strategy for this.
12. Don’t keep up with the Joneses
Buying a bigger TV because your best buddy just got a new TV is a sure way to stay broke. Happiness doesn’t come from comparing yourself to your friends and neighbors. You were perfectly happy with your old TV before you saw your brother’s new TV so don’t let comparison be the thief of your joy. The appearance of wealth is not the same as wealth.
13. Build up an emergency fund
Having enough money set aside so that car engine trouble or a random medical bill doesn’t send you into a negative spiral of debt is critical for financial success. Aim for at least $1,000 at first and then start building a fund that covers 3-6 months of expenses. You might need more coverage if you expect it would take longer to find a job if you were laid off. Yes, this is a hard ask for many folks but it doesn’t negate its importance as a sound principle of finance.
14. Use the power of goals to focus your energy
What is your ultimate goal? Do you want to retire in 15 years? Or 30? Do you want to save up enough money to travel more? Do you want to pay off your mortgage? Be completely debt-free? Understanding your goals is critical for focusing your energy and structuring your values and thus your spending and saving habits.
15. Renting isn’t throwing your money away
Get that idea out of your vocabulary. Renting makes a lot of financial sense depending on your situation and sometimes buying a house is not the right money move. Understand the trade-offs because renting vs buying.
16. Make it your goal to acquire assets that earn money while you sleep
The difference between the haves and the have-nots (besides privilege), is often that the have-nots work for their money whereas the wealthy have their money work for them. If your money isn’t making you money, you will always struggle to accumulate wealth.
17. Strive for “Fuck you” money
Having enough money saved gives you options and options give you freedom. If you have enough money to live off for a year and your work situation is driving you crazy you have the secret option to say “fuck you” to your job and walk away if it gets too much. This is the ultimate power of money. It buys you options.
18. Understand that you can’t plan for Black Swans
The most important lesson from history is that we can’t predict the future because the whole of history is filled with surprising events that no one saw coming. Future-proofing yourself is critical to personal and financial success.
19. Don’t just make yourself non-fragile; make yourself get stronger when stressed (anti-fragile)
It’s not enough to not fall apart when stressed; the best situation is to position yourself to get stronger when exposed to stress. This is what Nassim Taleb calls being anti-fragile.
20. Understand the role of luck in success
Here’s an analogy to understand “winners” in stock picking. Take a million people and have them guess a coin flip. Everyone who guessed correctly moves to the next round. Have them flip again. Winners move forward to the next round. And so on. Eventually, this coin flipping competition will, through sheer luck, select for a person who correctly guessed many coin flips in a row. Psychologically, this one lucky winner might come to believe they are very skilled at the art of coin guessing. Successful stock picking follows the exact same principle. Nobody fully understands the role of luck in stock picking so instead of trying to find a needle in a haystack, just buy the whole haystack as John Bogle famously said. This can be done through investment in broadly diversified index funds.
21. Understand the power of self-discipline
Most of financial success boils down to having the self-discipline to avoid market timing, living beyond your means, panicky behavior, and giving into instant gratification.
22. The less you need, the richer you become
The person who makes $50,000 a year and has everything they could ever need is richer than the person who makes $500,000 a year but will only be happy when they make a million. Learning to have enough is key to success because too much greed can be deleterious to your happiness.
23. Financial success boils down to developing good habits and eliminating bad ones
99% of the human mind is unconscious and thus most of our behavior is controlled through means outside of our consciousness. This is why having good financial habits is so critical. Learn to break the cycle of habits and instill good ones and you will be well on your way to winning with money. Behavior is 90% of the game.
24. Use the power of identity to shape your financial behavior
Are you the kind of person who just doesn’t see themselves as a “money person”? Does the idea of being wealthy seem against your core values and identity? Then you will have an exceedingly hard time developing the mindset necessary for financial success. Mindset is everything and identity is at the heart of it all.
25. Automate your saving
The extent to which you can automatically divert money into your savings or investment accounts prior to even seeing your money land in your checking will proportionally affect your savings rate.
26. Always take your 401(k) match
This is a no-brainer. It’s literally free money and you will never get a better return on your money.
27. Don’t keep too much cash in low-interest checking accounts
While it’s important to keep enough money fairly liquid for emergencies, you want to avoid having it sit in low-interest checking accounts. Even if transferring it to a savings account only nets you a 1% return compared to your checking, that’s still free money you’re throwing away. Every little bit adds up.
28. Figure out your retirement number
If retiring is one of your financial goals then you need to determine how much money you will need to actually retire. The general rule of thumb is to figure out how much your annual expenses will be when you retire and then save up a big enough nest egg so that withdrawing 3-4% of that nest egg each year will cover those expenses.
29. Time and autonomy are more valuable than money
Money on its own is worthless and won’t make you happy. However, time and autonomy are priceless. When you have enough, you can wake up and do exactly what you want to do. And that is the ultimate value and proven to be more highly correlated with happiness than sheer material success.
30. Accumulating stuff is less fulfilling than accumulating experiences
While obviously everyone is different, the scientific research on happiness is pretty clear that buying experiences has a longer-lasting effect on happiness than buying stuff. A new couch will make you happy for a small period of time but a new experience will make a lasting impression on your mental state.
31. Not learning from your mistakes is worse than making mistakes
There’s nothing wrong with making mistakes. Trial and error is the foundation of learning and personal development. But it’s a massive mistake to not learn from our mistakes and keep repeating them.
32. Learn to delay your gratification
Yes, buying a new gaming computer will give you instant gratification. But if you have to put it all on a credit card because you can’t afford it, you are setting yourself up for the ultimate financial bad habit: going into debt to satisfy impulses. Just don’t do it.
33. Good relationships matter when it comes to financial success
Being a spendthrift and marrying a penny pincher and vice versa is setting you up for relationship failure. Fighting about money is one of the strongest predictors of not only divorce but financial failure. Honesty, communication, trust, and shared values are critical to financial success. If you are dying to get out of debt as soon as possible but your partner doesn’t share the same value, you will likely never succeed.
34. Having multiple streams of income makes you less fragile to change
If you lose your primary income stream, having several small side hustles will go a long way towards providing a buffer until you get back on your feet. And you never know, you might end up turning your side hustle into a full-time job.
35. Asset allocation is critical for the success of your investment portfolio
It’s been proven that how you allocate your assets is almost as important as how much you save. If you invest a lot but have a poor allocation strategy, your portfolio will underperform every time. If you’re a Boglehead like me, then you will do well to set up a three-fund portfolio.
36. There is a point of diminishing returns in being excessively frugal when sometimes the best strategy is to focus on increasing your income
While frugality is an endlessly rewarding virtue, there comes a point where you are spending so much energy on extreme frugality that you’d get a better return on your investment by setting up a side-hustle or upskilling yourself to get a higher paying job.
37. Good financial strategy is often about what you don’t do than what you do
Having long-term investment success is more often about the fact that you didn’t sell at the wrong time than your selection of the highest performing funds. Often doing nothing is the best action.
38. Don’t let lifestyle creep happen when you get begin to make your money
Congrats. You just doubled your income. But if you double your expenses you’re back where you started. Don’t let lifestyle creep prevent you from achieving financial success. Raise your income and keep your expenses fixed and you’ll soon be saving enough to retire early.
39. Aim to pay this month’s bills with last month’s income so you can finally break the paycheck-to-paycheck cycle
This is the foundational strategy of budgeting systems like YNAB (You Need a Budget). They call this “aging your money.” If money goes into your account and goes right back out to pay bills you are living paycheck to paycheck. Instead, instead aim to pay for next month’s bills with this month’s income.
40. Living in a posh neighborhood is detrimental to your ability to save money
Just because you make a lot of money doesn’t mean you need to reflect that by living in the most expensive neighborhoods with the biggest houses. People with modest homes and modest clothes and modest clothes are sometimes far more wealthy than people with the outward trappings of being rich.
41. Eliminating long commutes are a sure-fire way to save a ton of money
Commuting is extremely expensive and has many hidden costs. The less you drive the more money you save.
42. The life skill of cooking pays huge lifetime dividends to your wallet and health
If you place a high value on eating out or buying prepackaged food, I won’t tell you you’re “wrong.” But the fact is learning to cook cheap and healthy foods has a huge impact on your monthly expenses and is often more healthy in the long run, which will save you tremendously on healthcare costs.
43. Diligence and hard work are the main ingredients in making your own luck
While there is definitely a thing such as serendipity and synchronicity, often these “miracles of luck” are amplified by preparation and hard work.