Part 4: Twelve Key Elements of Practical Personal Finance

Introduction

“You’ve got to be very careful if you don’t know where you are going, because you might not get there.”

In other words, each of us needs a plan for our finances. If we don’t have one, we may end up where we don’t want to be. The twelve Elements in Part 4 form the core of a practical plan that focuses on things you can do immediately that will help you make better financial decisions whatever your current age, income level, or background.

If you do not take charge of your finances, they will take charge of you. Why is it that although people in the US and the European Union have much higher incomes compared to those of people in post-communist countries, many struggle with financial stress? The answer is that financial insecurity is mainly the result of the choices we make, not the income we earn.

Personal finance and investment decisions can seem totally divorced from economics, but they are not. The law of comparative advantage (see Element 1.4), which explains why countries benefit from specializing in the activities they do best, also explains why you as an individual can benefit from specialization in things that you do well and are highly valued by others. Similarly, when it comes to building wealth over time, entrepreneurship, financial accountability, career planning, and investment in capital (especially human capital) are as important for individuals as they are for countries.

The twelve Elements outlined in Part 4 will not make you a financial wizard or an instant millionaire, but they will get you started right away with the basic steps to building wealth. More importantly, they will help you avoid major financial errors. Individuals who think they don’t have the time or the expertise to develop a sound financial plan may not apply even simple guidelines and may eventually find themselves in financial trouble.

Life, like economics, is about choices. Our goal is to enhance your ability to choose financial options that lead you toward a happy, comfortable, and rewarding life. That goal is not just about making money. When it comes to happiness, intangible assets, such as family, friends, engaging work, a good marriage, religious convictions, enjoyable hobbies, and helping others are equally if not more important.

Desiring more wealth is not unseemly, however. No matter what your objectives in life are, they are easier to achieve with less debt and more wealth, which offer you more choices, and not just in your own life. Some of the world’s most affluent people like Bill Gates and Warren Buffet have used their extraordinary wealth through their philanthropy to help others in multifarious ways and to tackle some of the world’s most intransigent problems. But you don’t have to be among the super rich to want more wealth to help your elderly parents or donate to religious, cultural, and charitable organizations.

“I [have] always told my students,” says John Morton, one of America’s leading economic educators, “that life is not a lottery and life is not a zero-sum game. Your success will not take away from anyone else’s success. Your success depends on your choices and choices have consequences.”⁽¹²¹⁾

Thus, all of us have an incentive to improve our financial decision-making. These twelve guidelines can help you do so.