Introduction

Growing up often comes with the responsibility of managing your finances. It's about taking control of your money and making informed decisions that will benefit your future. While some of us may have learned these principles from our parents, others must navigate this journey on their own. In this article, I want to share five key financial principles that I have personally found invaluable during my 20s. These insights have made a significant difference in my financial situation, and I hope they will help you too.

1. Pay Yourself First

One of the most crucial principles I’ve learned is the concept of paying yourself first. Many people make the mistake of waiting until the end of the month to save or invest whatever is left over after spending. Unfortunately, this often results in little to no savings. Instead, consider this: when you receive your paycheck, a portion is automatically deducted for taxes. Why not treat your savings the same way?

If you earn a gross salary, let’s say 100%, and 40% goes to taxes, you’re left with 60%. The idea is to set aside a similar percentage for your savings or investments right away. This means that if you can save 40% of your gross salary, you’re effectively living on the remaining 60%. This approach not only ensures that you save but also encourages you to live within your means.

To make this easier, consider setting up an automated savings plan. This way, as soon as your salary hits your bank account, a portion is automatically transferred to your savings or investment account. This method takes the discipline out of the equation and allows you to focus on managing your expenses with the remaining funds.

2. Never Touch Your Principal

The second principle I want to share is the importance of never touching your principal. In finance, the principal refers to the initial amount of money you invest, while the interest is the return you earn on that investment. Over time, as you consistently save and invest, your principal will grow.

It’s essential to establish a rule for yourself: do not withdraw from your principal. Instead, aim to live off the interest generated by your investments. This approach allows your capital to continue growing, and eventually, you may find yourself in a position where your daily expenses are covered by the interest alone. This is the essence of passive income, where your money works for you rather than the other way around.

3. Track Your Net Worth

Another vital lesson is the importance of tracking your net worth. There’s a saying in management: “You cannot manage what you do not measure.” Regularly assessing your net worth helps you understand your financial progress and identify areas for improvement.

To track your net worth, create a simple spreadsheet that lists your assets (what you own) and liabilities (what you owe). By calculating the difference, you can see how your financial situation evolves over time. This practice not only keeps you accountable but also motivates you to continue building your wealth.

4. Start Early

One of the biggest mistakes I made was thinking I could wait until I earned more money to start saving. The truth is, you cannot start too early. Many people underestimate the power of compound interest. Even if you can only save a small amount each month, starting in your 20s can lead to significant financial growth over time.

For example, if you invest a modest sum in your early 20s, the returns can compound, leading to a much larger amount by the time you reach your 30s or 40s. Conversely, if you wait until your 30s to start saving, you may find yourself needing to save much larger amounts to catch up. So, my advice is to start investing as early as possible, even if it’s just a small amount.

5. Do More Than Your 9-to-5 Job

Finally, I want to emphasize the importance of doing things beyond your 9-to-5 job. While it’s essential to focus on your career, many people find themselves with free time after work. Instead of spending every evening watching TV or scrolling through social media, consider investing that time into side projects or learning new skills that could lead to additional income.

Whether it’s starting a small business, freelancing, or even learning about investing, the time you spend on these activities can pay off significantly in the long run. Your future self will thank you for the effort you put in today.

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💡 Conclusion

In conclusion, mastering your finances is a journey that requires discipline, planning, and a proactive approach. By implementing these five key principles—paying yourself first, never touching your principal, tracking your net worth, starting early, and utilizing your free time wisely—you can set yourself up for financial success.

As you embark on this journey, consider using tools that can help you track your progress, like GMAT Sprint. It’s a great platform to monitor your financial growth and stay motivated. Remember, the earlier you start, the more significant the impact will be on your financial future. I’d love to hear your thoughts and any additional tips you might have. Let’s continue the conversation in the comments below!