Chiang’s 10 Financial Principles You Should Know

1. Pay yourself first

Before any bills or shopping, set your checking account to automatically transfer an affordable amount
each month into accounts designated for long-range goals (retirement or big purchases) and unexpected
emergencies (repairs, illnesses, job transitions). Saving for long term can be less liquid (less easy to
withdraw); however, saving for emergencies should remain liquid (easy to withdraw in an instant).

2. Budget your money

Create a budget of expected income and expenses, including saving goals. All people are to some degree
impulsive by nature, budgets give us set boundaries. It is naivety to think you do not need a budget.

3. Know your take-home pay

Before new expenditures, estimate how much income is likely to be available for you. “Net” income, after
all deductions (taxes and bills), is more useful than “gross” income before deductions. Keep in mind that
the cost of living varies so much place to place that some can move, take a pay cut, and end up far richer.

4. Start saving young

Recognize that your total savings are determined both by the interest you earn on those savings and the
time period over which you save. The sooner you start saving, the more money will make you money
without any work required by you! Turn compounding interest into a friend and not an enemy.

5. High returns equal high risks

Recognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the
interest rate offered to you, the investor, the higher the risk of losing some, or all, of the money you invest.
Diversification of assets is the best protection against risk. Like non-financial opportunities, if it sounds too
good to be true, it probably is. If you need the money right away, pick a more liquid (easy to withdraw) and
lower risk investment (lower returns).

6. Inflation and real interest

Inflation has existed each year for most of American history, averaging 3% (with periods over 20%), which
means that all un-invested savings loses on average 3% spending power each year. The real interest rate
on an investment is the investment return rate minus inflation (a savings account earning 1% is losing 2%
value a year if inflation is 3%). Investment options from low risk/low return to high risk/high return:
CD, Gov Bonds, Biz Bonds, Index Funds, Mutual Funds,* Stocks* *depends on what you buy

7. Your credit past is your credit future (350-850, 650 national average, 750 good)
Be aware that 3 credit bureaus record borrowers' histories of repaying loans and their overall debt ratio.
Lower credit scores mean more expensive loans and even more difficulty finding future apartments.

8. Don't borrow what you can't repay

Before you borrow, compare your total payment obligations with the income that you will have available to
make these payments. Remember your net worth is your assets (money) minus your liabilities (debts).
Most Americans are negative net work (under -1%) which means a homeless person is richer than most
Americans (though most Americans have a job to pace their debt, though may never pay it all off).

9. Saving money is the same thing as earning more

Tax is your single largest living expense. Accumulate wealth faster by choosing investment strategies that
are tax advantaged (max out on your 401k if offered by your employer, open an IRA, buy gov bonds, etc.).

10. Stay insured

View emergencies as inevitable future bills. Purchase insurance to avoid being wiped out by an
emergency, such as an illness or accident. An insurance plan should be part of every financial plan. Auto
insurance is required, health is critical, and apartment insurance is cheap and a good idea!