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The ABCs of Personal Finance

Thornburg Investment Management
5 Apr 2024
3 min read

Unpack building wealth into budgeting, investing behaviors, and the power of compounding to help achieve financial goals and wealth accumulation.

When it comes to managing money, understanding the basics of personal finance can seem daunting. Whether you’re just starting your financial journey or have been working towards your goals for years, it’s helpful to break down some of the most important concepts into simple, digestible lessons. Here’s a guide to the ABCs of personal finance that can help you take control of your financial future.

A is for Accumulation

The cornerstone of every financial plan is accumulation. The goal is to build wealth over time, which starts as soon as you get your first full-time job—particularly if your employer offers retirement savings options like a 401(k) or 403(b). The reality is that unless you’re set to inherit a fortune, accumulating money is the key to achieving your financial and life goals.

Accumulation doesn’t stop once you retire. Even as you begin to withdraw money from your accounts in retirement, it’s crucial to keep some investments growing. With increasing longevity, your financial needs may stretch for decades into the future, making continuous growth essential.

B is for Behaviors

The behaviors you develop will ultimately shape your financial success. At the heart of sound financial management are three key behaviors: budgeting, regular investing, and remaining invested.

Budgeting is fundamental, though it often gets a bad reputation. Budgeting means taking control of your money by tracking your income and expenses. It allows you to make informed decisions about spending, saving, and investing.

Regular investing is another essential behavior. Once you’ve established an emergency fund—typically enough to cover 6-9 months of expenses—regular contributions to investment accounts, such as retirement accounts, help ensure long-term growth.

Remaining invested may be the most important behavior of all. When markets are volatile, it can be tempting to pull money out to avoid losses. But timing the market is a losing game. History has shown that those who stay the course are more likely to achieve their financial goals than those who try to jump in and out of investments based on market fluctuations.

C is for Compounding

Albert Einstein famously called compounding the “eighth wonder of the world,” and for good reason. Compounding is the process of earning returns on your returns. When you reinvest interest, dividends, or capital gains, you create a snowball effect where your money grows faster over time.

Here’s how it works: If you invest $1,000 at a 5% annual interest rate, at the end of the year, you’ll have $1,050. If you leave that money invested, the next year you’ll earn 5% on $1,050, not just the original $1,000. Over time, this exponential growth can have a significant impact on your wealth.

By mastering these foundational concepts—accumulation, behaviors, and compounding—you’ll be well on your way to building a strong financial future. Personal finance doesn’t have to be overwhelming. With the right knowledge and consistent habits, anyone can take control of their financial destiny and achieve their goals.

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