The importance of financial management in daily life

According to A.C. Pigou in his book The Veil of Money (1949), money is commonly used as a medium of exchange. Some people say, "Money is not everything," but everything costs money. That's why everyone is working hard and trying to earn money. But which is more important, making money or managing finances? For example, a city has employees who earn 7 million a month. This worker has worked for five years and has only $30 million in savings. Then there are farmers in the village with an income of up to 5 million per month. But after five years of activity, the farmers already have assets in the village in the form of houses worth 60 million dollars. Do you compare the assets of workers and farmers? Why do employees with higher incomes have fewer assets? Of course, talking about financial management, especially personal finance, cannot be separated from lifestyle management. As in the example of farm workers above, the lifestyle of urban workers is certainly different from that of rural farm workers. In addition to the cost of living which tends to be higher in urban areas, the needs of workers and farmers are not the same. Farmers certainly do not need to buy formal clothes to work, nor do they need complete equipment such as laptops and smartphones. But this is not the only reason why workers' wealth is significantly lower than that of farmers. With greater income, employees should be able to optimize their income more. For that, it is important for each individual to understand how to manage his finances. There are also cases of people with high incomes but high consumer debt.

In the book All Your Worth: The Ultimate Lifetime Money Plan, Senator Elizabeth Warren and her daughter Amelia Warren Tiagi popularized the 50/30/20 principle of financial management. This principle is also in great demand among millennials who want to enter the world of work and learn to manage finances. This principle provides the basic rules for managing your finances by dividing your after-tax income and spending 50% on needs, 30% on needs, and 20% on savings.

If you simulate an employee with a monthly net income of 7 million, that employee has a monthly savings of 1.4 million. Over five years of service, employees should be able to save more than $30 million. Of course this has to be done consistently and with commitment. Another example popularized by American entrepreneur, author, and motivational speaker Jim Rohn is in the 7-10-10-10 Budgeting Act. He divides all the income we earn into four groups. Simply put, the distribution looks like this:

•                70 – Spend 70% of your first income on daily needs, including entertainment.

•                10 - Save the first 10% of this income for future funding.

•                10 - Invest the second 10% of your income

•                10 - Give the third 10% to those in need.

In this budgeting method, Jim Rohn allocates a portion of his income to investments and retirement funds. Compared to Warren's principle of saving 20%, Jim Rohn set aside only 10% for savings and invested another 10% in the hope of earning more in the future. Once you decide to invest, you need more knowledge to ensure that the invested funds do not make a profit or even a loss. In addition, there is also a very well-known and widely used method of financial management among Japanese housewives, which is called a household account book. This method was first introduced in 1904 by a journalist named Makoto Hani. In 2017, this method was popularized again by the book Household Book by Fumiko Chiba: Japanese Saving Techniques. This book has four key questions that must be answered if you want to improve your economy.

•                How much money do you have?

•                How much money do you want to save? • How much money do you spend regularly?

•                How can I increase my savings?

Fumiko believes the Kakeibo Method can change the way we view money and make us more aware of how we manage it.

Here are some steps to keep in mind when implementing the Kakeibo method:

1.             Record all income received at the beginning of the month, both fixed income and side income such as monthly salary.

2.             Set aside the money you want to save this month.

3.             Spread the remainder across multiple expense items and sort them into four categories:

·                Subsistence or basic needs such as groceries, bills, mortgage payments and other obligations.

·                Optional or secondary needs including entertainment, dining out, etc. o Culture, or the need to gain insight into books, films, magazines, etc.

·                Additional costs or other expenses such as gifts, house repairs, car care.

However, you can adapt the above expense items to your needs, for example, by creating more precise details.

4.             Prepare several envelopes to store the allocation of funds from these expenditure items. You can choose different envelope colors and name each envelope according to its intended use. Don't forget to record the cost you get from each envelope.

5.             At the end of the month, evaluate financial activities. See which envelopes and mailing items are saving you a lot of money and which are over your budget. Knowing this will allow you to adjust your budget for the following month. If you reduce your expenses over time and save more money, you have successfully implemented Kakeibo.

Today there are many ways to manage finances guided by success numbers. In the past, you may have focused solely on working and making a lot of money, but you didn't understand how to spend the money you earned. We often run out of money at the end of the month without knowing where our expenses are going. That's why it's so important to manage your household budget as well as your lifestyle. The decision to manage finances also requires your commitment and consistency. Either way, of course it must be adjusted to your needs and priorities.