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What Are the Basic Principles of Financial Management?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 22 August 2014
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Successful principles of financial management should be effective in either a good or bad economy. They should be universal and able to work when applied to any financial condition. Sound financial principles begin with goal setting, saving money, and patiently working toward growing an investment. The steps should be realistic but also give a person or a business something to strive for in the future.

Setting a goal gives an incentive for adhering to principles of financial management. The goal should be precise, and subpoints might include the amount of time required to reach that milestone or the date by which the goal needs to be reached. Establishing a goal by itself is not enough, and steps that will help the goal become a reality should be recognized. Investing in the financial markets is one way to grow a sum of money over time. Also, something that might be a little bit safer than the stock market is a savings account, and money will grow there at an interest rate over time.

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Applying principles of financial management does not translate into taking on debt. There is good debt, and there is bad debt. A good investment in the future is education, and costs required to attend a university or graduate school could exceed the average person's savings. Loans for education are largely considered good debt because the results could lead to future earnings from a career and knowledge that exceeds the borrowing costs. Other debt, such as credit card debt, should be paid off as soon as possible, and certainly payments should be timely so that no extra fees are accrued.

Establishing the habit of shopping around before making any purchases, even when it comes to insurance, contributes to principles of financial management. When it comes to car insurance, there are many different providers available. Although the cheapest agency and policy may not be the best choice, a more expensive investment will pay off in time if a claim needs to be filed and a comprehensive insurance policy pays for the damages.

Living within one's means is a result of living by sound principles of financial management. Banks typically offer an automatic bill pay option. If this option exists, it might be a good idea to take advantage of it. Not only could an automated routine work for paying bills but also for directing money into a savings account or an investment, like a mutual fund. Getting into the habit of spending less money than comes in will result in a situation that is not dependent on the next paycheck for survival.

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