According to experts, everyone needs to control their income and expenses, have an optimal borrowing and repayment plan, build an investment portfolio, and implement financial protection measures.
I once heard about four pillars of personal financial management: paying off debt, saving, insurance, and investing. If these steps are followed in order and prioritized accordingly, each person will have a solid personal financial foundation.
According to experts, is this knowledge correct? How should I understand the pillars of personal financial management?
Thanh Thảo (31 years old)
Managing income and expenses, and developing saving habits are essential steps in personal financial management. (Image: Forbes)
Consultant:
When creating a personal financial plan, it's essential to ensure the inclusion of the following five aspects: managing income and expenses, optimizing cash flow; developing an optimal borrowing and repayment plan; building an investment portfolio that aligns with risk tolerance, investment goals, and financial needs; establishing financial protection measures in case of unforeseen circumstances; and other aspects including personal income tax, retirement funds, social security, inheritance, and marriage.
Therefore, the four pillars you mentioned are only parts of the personal finance picture, not a complete and comprehensive one. Here are five aspects of personal financial management.
Managing income and expenses and optimizing cash flow.
Just like building a house, this is about creating a solid foundation. You need to ensure that your cash flow (income) is optimized and your cash flow (expenses) is balanced, avoiding situations where income doesn't cover expenses.
At this stage, you can follow various methods such as the "50-30-20 formula," which allocates 50% to essential expenses, 30% to enjoyment and entertainment, and 20% to savings and investments. However, the formula will vary depending on income levels. Regarding managing income and expenses, I advise you to avoid the following situations.
Firstly, avoid spending money on unnecessary desires, emotional spending, or fleeting impulses rather than "unavoidable" expenses. You should review your spending to ensure it is reasonable and accurate, and cut out unnecessary expenses.
Secondly, prioritize short-term spending over long-term spending. Remember, disciplined spending habits create future sustainability. You can't build a retirement fund for 30 years by spending short-term or saving too little (<10% of income). Always set aside a long-term budget for yourself.
In addition to ensuring reasonable spending, don't forget that you need to increase your income streams by learning and developing new skills. Diversifying your income helps ensure good risk management and also helps increase your assets sustainably. Every skill you learn is an opportunity to increase your income; keep learning to create multiple cash flows.
Restructuring loans and debts
Paying off debt is one aspect you mentioned, and optimizing your loan is the other. The principle to remember is to reduce debt gradually and borrow wisely.
Debts should always be within your ability to repay from your monthly income. There are two types of debt to distinguish: long-term debt on investment assets (such as mortgages) or short-term debt on consumable assets (such as loans for phones or laptops). For long-term debt on investment assets, the monthly payment is essentially the cost of saving and investing, and should be a maximum of 30% of your income.
For short-term debt on consumable assets, the monthly payment should be for enjoyment and leisure expenses, ideally at 10-15% of income. You can pay off the debt using two methods: paying off smaller amounts first or larger amounts first, depending on your circumstances.
Secondly, it's optimal to take out smart loans. Instead of paying high interest rates, if you take the time to research loan conditions based on criteria such as loan amount, interest rate, variable interest rate, preferential period, and accompanying conditions like insurance incentives and early repayment penalties, you can generate surplus funds from smart borrowing. This is a significant amount of cash flow if your loan is large and long-term. For example, customer A borrows at 12% per year from bank B while bank C offers a loan at 10% per year. If customer A chooses bank C instead of bank B, they will have surplus funds to spend on other things.
Smart investing and portfolio optimization
In investing, you shouldn't "put all your eggs in one basket" and must know how to diversify your portfolio to optimize returns and manage risk. If you don't have much time and experience, start with a small amount of capital, or steadily accumulate assets safely. Seeking advice from experts and financial advisors is also a good option for those with little experience.
Develop financial contingency plans.
This is about preparing for unexpected risks. You need to understand that there are two main types of financial losses or complete loss of income.
First, job loss or layoff. This situation requires you to switch to a new job or needs a period of adjustment. Building a contingency fund for this, equivalent to 3-6 months of income, is necessary and advisable.
Secondly, unforeseen events can occur, such as accidents, illnesses, serious diseases, or even premature death while still in the workforce. While many contingency plans exist for these situations, the most basic are health insurance and social insurance. However, given the current demand for "good food and fine clothing," considering life insurance or health insurance is advisable. Similar to investments, you need to be careful, thorough, and seek out qualified experts and advisors because insurance policies are long-term and complex, encompassing both savings and investment.
Other aspects of personal finance
In personal finance, social security, retirement funds, personal income tax and other taxes, inheritances, and marital assets are all issues you should be concerned about. Short-term concerns include taxes and marital assets. Long-term issues include retirement funds, inheritances, and social security. Having a better understanding of these aspects will also help you build a solid financial foundation for the future.
Tran Manh Hoang Viet
Personal Financial Planning Expert
at FIDT Investment Consulting and Asset Management Company
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