1. Manage personal cash flow effectively: The first step towards financial freedom

Robert Kiyosaki, author of the famous book “Rich Dad – Poor Dad” once said: “It doesn’t matter how much money you make, it matters how much money you keep, how much money you can serve you and so that money can generate more money.”

Personal financial management is an extremely important life skill. Even this skill is recommended by many experts and international organizations to be popularized from the time they are in school because of many benefits such as:

• Once you are financially secure, your morale will be uplifted, your productivity will also be improved.
• Abundant capital will open you up to many opportunities for personal and financial development, pursuing higher education, learning new languages, or profitable investing;
• You are in a better situation to deal with unexpected life incidents;
• Create a solid financial foundation for a comfortable life and a comfortable retirement.

In lots of countries, many people are still confused about this skill due to the lack of proper teaching. As a result, many people often fall into a shortage of money at the end of the month and end up having to borrow to cover their spending. What’s even worse, financial stress can make us feel uncomfortable, easily grumpy, and affect the relationships in our life. We can end up having problems with our spouses, parents, children,  and friends.

2. 7 principles to help you become a “master” of personal financial management

The following are the secrets of effective financial management, often applied by financial professionals:

2.1. Always review spending

Always review the amounts that spend daily, monthly, annually… such as tuition, market money, clothes shopping,… Then classify into 2 basic categories: can cut (little or no importance) and cannot cut (important).

For instance, the items that are important and often account for the majority of family spending are tuition fees. However, you can’t cut it. Instead, you can cut back on less important things like shopping for clothes, watching movies, and coffee with friends,…

2.2 Make clear financial goals and roadmaps

To manage your personal cash flow effectively, always set financial goals. Your goals can be long-term, medium-term or short-term, but you need to be really clear to have the right savings path.

So let’s say you plan to save money in the next year to travel with your family. If the amount you need for travel is about $12,000USD. Then, every month you need to set aside a minimum of $1,000USD to achieve the above goal.

2.3. Don’t spend more than 10% of what you earn

The principle of financial management that is often reserved by young people is that you should not spend more than 10% of what you earn. If your income is $5,000USD per month, experts recommend that you do not buy a bag that costs more than $500USD.

10% of the total income is quite a lot, while the value of that bag can be gradually reduced over time. At the same time, being “easy” with yourself also puts you at risk of buying other items that also cost $500USD. As a result, you can spend all your salary before the end of the month.

It is best to buy a bag for under $500USD.   And then spend large amounts of money on assets that will increase in value, and return you an income.

2.4. Try to get out of the “spiral” of debt

Many young people have the habit of spending all their money from the middle of the month, then borrowing debt to “maintain their lives” in the next half of the month. It is very difficult for you to get out of this “spiral” without strong determination.

You should try to pay off your current debt and avoid borrowing more next month. At the same time, you should tighten your spending, avoid shopping for unnecessary items. As a result, getting out of the “spiral” of debt will no longer be too “far away”.

2.5. Save 10 – 15% of monthly income

Saving a minimum of 10-15% of monthly income is a basic but extremely effective financial management principle for beginners. If you have a total income of $5,000USD/month, you should save from $500 to $750USD per month.

Once you have adapted, you can increase your savings by 20%, 25%, 30%… up to 50% of monthly income. Note, you should only increase your savings gradually, do not set your goals too high in the first place because it is easy to make yourself give up.

2.6. Increase income with multiple sources

The success of entrepreneurs lies not only in the secret of effective financial management, but also in the diversity of their income channels. This is also an “advanced step” for you towards financial freedom.

If you have free time after office hours, you can do many other jobs such as writing content, managing fan pages or small businesses. However, it should also be noted that doing a lot of work, means that you need to know how to properly organize and balance your time.

2.7. Saving with a life insurance policy

Today’s life products are extremely diverse in benefits. Not only protecting participants’ finances against risks in life, many life insurance policies also incorporate accumulated and investment benefits, helping participants practice reasonable spending management habits and have ample income for a comfortable retirement age.

You don’t need to spend too much money on life insurance. According to financial experts, 10% – 15% of monthly income for life insurance is optimal.

3. How to manage personal cash flow effectively and popularly today

There are now many ways to manage personal finances effectively, including the 50-30-20 rule and the 6-jar rule:

3.1. Rule 50-30-20

This is considered a basic but extremely effective way to manage personal cash flow because you only need to divide your income into 3 items:

• 50% of income goes to necessary living expenses such as housing, food, travel.
• 30% of spending on flexible expenses such as entertainment, hospitality … which you can cut back, if needed.
• 20% will be spent on debt repayment as well as savings for goals. You can divide this savings into several items for each goal to make it easy to follow.

Advantage:

• Easy to remember, easy to understand and easy to apply.
• Many subjects with different incomes can be applied.

Shortcoming:

• Requires high self-discipline for each individual.
  

  3.2. The 6-jar rule

The 6-jar rule was created by author Harv Eker, author of many world-famous financial books such as “Secrets of the Millionaire Mindset” and “Get Rich Quick”… With this management, your income will be divided into more detailed amounts than the 50-30-20 rule:

• Bottle 1 – Essential spending (55% of income) provides expenses for daily living activities such as food, housing, utility bills…
• Bottle 2 – Long-term savings (10% of income) for long-term savings goals for life such as buying a house, buying a car, getting married, doing business …
• Bottle 3 – Education fund (10% of income) to participate in certificate courses, skills, workshops … to cultivate professional knowledge for yourself, increase your chances of promotion at work.
• Bottle 4 – Enjoy (10% of income) to reward yourself after working hard and saving.
• Bottle 5 – Financial investment fund (10% of income) used for investment, savings, business capital contribution … profitability, creating passive income.
• Bottle 6 – Charitable funds (5% of income) will be used to help relatives, friends or for community funds.

Advantage:

• Create high discipline for savers.

Shortcoming:

• Complicated, not suitable for beginners.
• Difficult to apply with an average income or less.

4. What are the frequently asked questions about personal cash flow management?

The following are frequently asked questions about how to manage personal finances and solutions:

4.1. Where should personal cash flow be managed?

Depending on your needs and preferences, you can use books, excel, financial management applications on your phone … In particular, the application is a way to manage personal cash flow loved by young people because they can easily update and track their latest financial status anywhere.

4.2. What should a beginner in personal financial management pay attention to?

When you first start managing your personal finances, it’s important to be consistent with your goals. You may feel unused at first, but gradually you will develop the discipline of saving and spending for yourself.

4.3. What are the common mistakes when managing personal finances?

There are many mistakes that make it easy to break financial management principles such as bad debt, insatiable shopping, lack of consistency … Therefore, you should try to overcome those mistakes to achieve your financial goals.

The above are the ways and principles of personal financial management. It should be noted that no principle or management is perfect. It is important that you stick to the goal set earlier and try to do it. In this way, you can quickly get out of the “debt spiral” and gradually move towards financial freedom.