First-Principle Thinking in Personal Finance

Elon Musk often describes “first-principle thinking” as breaking a problem down to its most basic truths and building back up. The same idea applies to personal finance. When you strip away products, predictions, and noise, nearly every financial decision rests on three first principles.

These principles explain why some choices support long-term stability while others create unnecessary stress. They do not change with markets or headlines. They form the foundation for better financial decisions.  They are Growth, Safety, and Liquidity. 

First Principles Thinking

Growth

The cost of living tends to rise over time. Inflation has averaged about 3 percent over long periods. If your assets grow slower than that, your purchasing power declines. Over many decades, stock market returns have averaged about 8 to 10 percent per year. High-quality bonds have averaged about 4 to 6 percent. A balanced portfolio has tended to land around 6 to 8 percent. These are not guarantees. They simply show why growth matters if the goal is to stay ahead.

Growth comes with volatility. This is why long-term investments should be dollars you will not need for 7, 10, or even 15 years. Growth has three factors, inflation, volatility, and time. The goal is to own assets that tend to keep up with inflation rather than assets that predictably lose value over time. Most long-term investments can experience 30, 40, or even 50 percent swings. Over time, if they are diversified and tied to inflation-sensitive areas of the economy, they are likely to still grow. Time is the key. Look at almost any inflation-oriented asset over a decade or two and it is usually higher.

Safety

Safety begins with placing money in the right bucket based on time and purpose. The Now, Soon, and Later structure helps prevent permanent loss because each dollar is invested according to when it will be needed. When short-term needs are met, long-term investments can remain in place long enough to recover from normal market declines.

Markets move up and down. The average bear market decline is about 35 percent, and markets have recovered from every downturn on record. Volatility is normal. The real risk comes from turning temporary declines into permanent losses because money was invested in the wrong bucket at the wrong time.

Safety has three factors: risk level, allocation, and behavior. Risk level is set by the time horizon. The best way to manage this is through The Bucket Plan, which consists of three buckets. Now-bucket dollars belong in cash and stable assets because they may be needed soon. Soon-bucket dollars can take a modest amount of risk but still need to be accessible. Later-bucket dollars can take more risk because they have the time required for recovery. Allocation matters because different investments behave differently. When money is spread across stocks, bonds, cash, and real assets, no single decline becomes overwhelming. Behavior is the most important factor. Selling during a downturn, taking excessive concentration risk, or using leverage at the wrong time are the actions that create permanent harm.

The goal is not avoiding volatility. The goal is avoiding irreversible outcomes. A bucket-based plan keeps short-term needs protected and gives long-term investments the time they need to recover. Safety is about staying organized so time can work in your favor.

Liquidity

Liquidity is often overlooked, yet in my experience, more wealth has been lost to liquidity problems than to market volatility. This is why being clear on the Now and Soon buckets is so essential. These buckets begin with a plan and ensure that upcoming spending needs are set aside in stable and easily accessible assets.

Liquidity problems arise when families must sell long-term assets during a downturn or when too much money is tied up in investments that cannot be accessed without penalties or steep discounts. In 2008, home prices declined by approximately 27 percent. Most markets eventually recovered. The families who suffered the most were those forced to sell at the bottom because they had no liquidity elsewhere.

Liquidity has three factors, reserves, access, and planning. Reserves protect you from having to sell long-term assets during stress. Access means holding enough in cash and short-term investments to cover upcoming needs. Planning ties it all together by matching each dollar to the correct time horizon. When Now and Soon buckets are properly funded, the Later bucket can stay invested, even through large market swings.

Liquidity protects timing. It keeps long-term assets invested long enough to recover and prevents temporary setbacks from becoming permanent losses. When the plan is clear and buckets are funded correctly, families avoid the most expensive mistakes and gain the freedom to let time work in their favor.

First Principles Guide What to Do, PlanAssist® Guides How to Do It...

The first principles describe what must be true for good decisions. Growth, Safety, and Liquidity are the what when it comes to making better financial decisions. Have a plan, be diversified, and seek counsel are the how to make better financial decisions. PlanAssist® provides the structure to apply them consistently.

Have a Plan

Growth only works when it has a purpose. A clear plan defines time horizons, spending needs, and priorities. This prevents speculation and helps match the right investments to the right goals.

Be Diversified

Diversification spreads risk and supports safety. It reduces the impact of any single decline and helps avoid irreversible losses.

Seek Counsel

Counsel helps protect liquidity. It brings a broader view during both optimistic and stressful moments and helps prevent decisions that interrupt long-term progress. When money has different purposes and time horizons, counsel helps match assets to those needs.

Putting It All Together

When you evaluate a decision through Growth, Safety, and Liquidity, the complexity of finance becomes more manageable. These principles guide better choices. They make it easier to see what matters and what does not.

Adding the PlanAssist® approach creates the discipline to apply those principles over years and decades.

• A plan guides growth.

• Diversification supports safety.

• Counsel protects liquidity and timing.

Together, they lead to clearer decisions and steadier long-term results.

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DISCLOSURE - All written content on this article is for information purposes only. We utilized ChatGPT and other sources for this article. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.