When the topic of money is spoken about, often mentioned are the four principles of finance. What are the four principles of finance exactly? Income, savings, spending and investing are the key four principles that a person should consider when maintaining their finances at a healthy and calculated level. By following these principles in the order above, a person can not only feel more comfortable in their finance management, it may also enable them to build up their wealth over time. Within this article, I will go into more detail about each principle and what they mean to a person, as well as how a person can develop these.
Income is the first of the four principles. This is because it serves as the fortification for the other three. Without income you cannot move onto the next three stages. Picture a pyramid with income as the point and the three other principles as the rest of the pyramid. Most people begin to build up their finances with income, whether this is from a job or other methods of funding. A secure job is the most popular as it provides a steady income that the person can map out and predict when they are being paid and how much.
Once a person begins to gather income, they can move onto the next principles in any order that they like. However, the most strategic principle to approach next is ‘saving’.
The saving principle involves storing the income that the person has acquired away. This means that the person can use this income in the future whilst also gathering interest on the money. Saving is a viable option depending on the situation that the person is in. For example, a person that is trying to afford a mortgage on a house or maybe even to buy a car. This person will save up most of their income whilst also leaving some spare for necessities, so that they can afford the large payment. On the other hand, a student that has income will not save their money as there is not a need to do so in their typical situation.
The next principle of finance is ‘spending’. Spending is a key motivator to create more income. Picture this scenario: A person has a hard week at work and gets paid weekly. This person will not think about saving this income immediately because they have just finished a week of long work. Instead they will spend the income as a reward. After this, the person will want to keep working hard to make the reward worth it at the end of the week.
The final principle of finance is ‘investing’. Investment, when done correctly, can be a very smart use of the initial income that a person can get. A person can invest into a lot of different options such as real estate or even stocks. However, investment can be very risky and can also cause a loss of income if the investment wasn’t calculated. Investment is very similar to saving as both of these options result in the income not being accessible instantly, instead waiting and using it at the right time whilst also gaining interest or investment value.
Overall, the four finance principles come together in a lot of ways, all of which can be organised in several different ways. The way that the principles can be organised makes the person a lot more comfortable financially and this can be developed even further with a financial plan. For example, if a person is looking at their income, they can separate how they are spending this into categories of: saving, investing and spending. This way there is a representation of how they are spending their money and what exactly on which makes the person a lot more confident with how they behave with their money. Gathering income is the main way that a person can begin to start a financial plan as they need this to move onto the next steps. A secure job is very useful for this as it means that the person can create a cash flow chart that shapes where their inflows are going so that they can move onto the principles and the outflows.