5 Steps of Personal Financial Management?
The following are the 5 Steps of Personal Financial Management:
1. Improving Cashflow
2. Getting Out of Debt
3. Setting Up Emergency Fund
4. Getting Protected from Life’s Risk
5. Investing for your Future
Step 1: Improving Cashflow
Pay Yourself first
- In Improving Cashflow, you need to learn the discipline to save before spending because savings is the most essential expense because it buys your future.
Follow this formula: Income - Savings - Expenses
Needs VS. Wants
• Need - Something you need to have, something you can't do without.
• Want - Something you would like to have, it's not absolutely necessary.
50-20-30 Budget Rule : 50% needs, 20% savings, 30% wants
Envelope Method or Jar Method
Get an envelope for every need you have. It helps in the management of your savings and expenses.
Earn More Desire Less
- Owning less stuff means lower expenses,
- Too much possession ends up possessing its owner
- Things fade and you can never get contentment in possessing more things as there is always new around the corner and someone else has always more than we do.
Step 2: Get Out of Bad Debt
Good Debt vs. Bad Debt
- An investment that will increase in value or produce long-term revenue is considered good debt. while bad debt is something we loan just for consumption.
Step 3: Set Up Emergency Fund
- Determine your average monthly expenses based on your needs.
- Set Up Emergency Funds equivalent to 3 to 6 months of your average monthly expenses.
- Place it in an investment that is very liquid: Regular Savings, Checking, Time Deposit.
Step 4: Getting Protected from Life’s Risk
- Yourself is the most important asset because without you working, income won’t be generated.
- The younger and healthier you are, the lesser premiums you have to pay. Get insurance while you are still young.
Step 5: Investing for Your Future
Get Yourself Educated
• Assess Yourself: Risk, Liquidity, Return
- Risk is the possibility of losing the amount you invested
- Liquidity is how an investment can easily turn back into cash
- Return is the income from investment or ROI