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Ten principles of personal finance
List and briefly explain the ten principles and five steps discussed in the textbook, that form the
foundations of personal finance:
1. The best protection is knowledge: you need to understand the basics of personal financial
2. Nothing happens without a plan: saving isn’t a natural event, it must be planned
3. The time value of money: without recognizing the existence of the time value of money, it is
impossible to understand the compound interest, which allows investments to grow over time
4. Taxes affect personal finance decisions: because taxes help determine the realized return of an
investment, they play an important role in personal finance
5. Stuff happens, or the importance of Liquidity: you must plan for the unexpected events
6. Waste not, want not – smart spending matters: what you need, the quality that you expect, get
the best price
7. Protect yourself against major catastrophes: the focus of insurance should be on major
8. Risk and Return go Hand in Hand: the minimum return must greater than the anticipated level
of inflation
9. Mind games, your financial personality, and your money: avoid mistakes and pitfalls so that
you can improve your process
10. Just do it
Five important steps to financial planning process
1. Evaluate your financial health: begin with an examination of your current financial situation.
Keeping track of what you spend. See the whole financial picture
2. Define your financial goals: know what you want. Write down or formalize your financial goals
3. Develop a plan of action: your financial plan should have flexibility for the unplanned, liquidity
for unpredicted events, protection for catastrophic events and minimization of taxes
4. Implement your plan: stick to your plan.
5. Review your progress, reevaluate, and revise your plan