According to A.C. Pigou in his book, The Veil of Money (1949), money is anything that is commonly used as a medium of exchange. Some say that “Money is not everything” but everything requires money. Therefore, everyone tries to work hard to make money. But which is more important, making money or managing finances? For example, there is an employee in the city who earns 7 million every month. The employee has worked for five years but only has assets in the form of savings of 30 million. Then in a village there is a farmer who earns a maximum monthly income of 5 million. However, during his five years of work, the farmer already has assets in the form of a house worth 60 million in the village. Let’s compare the assets owned by these employees and farmers? Why doesn’t an employee who has a larger income have more assets?
Talking about financial management, especially personal finance, of course cannot be separated from lifestyle management. Like the previous example of employees and farmers, the lifestyle of an employee in urban areas is certainly different from the lifestyle of a farmer in rural areas. Apart from the fact that the cost of living in urban areas tends to be more expensive, the needs of an employee and a farmer cannot be the same. A farmer certainly doesn’t need to buy formal clothes for work, nor does he need complete gadgets such as laptops, smartphones and others. However, this is not solely the cause of employees having far fewer assets than farmers. With greater income, employees should be able to optimize their income more. This is why it is important for every individual to understand how to manage finances. There are also quite a few cases of people who have more income but also have more consumer debt.
In the book All Your Worth: The Ultimate Lifetime Money Plan, Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi popularized the 50/30/20 principle for managing finances. This principle is also very popular with millennials who have started working and want to learn to manage their finances. This principle has basic rules for managing finances by dividing after-tax income and allocating it to spend 50% on needs, 30% on wants, and setting aside 20% for savings.
If we simulate with an employee who has a net income of 7 million per month, then each month the employee has savings of 1.4 million. If collected over five years of work, employees should be able to have savings of more than 30 million. Of course, this must be implemented consistently and with full commitment. Another example is the 70-10-10-10 Budgeting Method which was popularized by Jim Rohn, an American entrepreneur, author and motivational speaker. He divided all the income we get into four groups. In simple terms, the distribution is as follows.
- 70 – Spend the first 70% of your income to meet your daily needs, including entertainment.
- 10 – Save the first 10% of that income for your future fund
- 10 – Invest the second 10% of your income
- 10 – Distribute the third 10% to those who need it more.
In this budgeting method, Jim Rohn allocates a portion of his income for investments and retirement funds. When compared to Warren’s principle, from 20 percent of savings, Jim Rohn only set aside 10 percent for savings and another 10 percent was invested in the hope of generating more income in the future. When deciding to invest, we must have further knowledge, so that the funds we invest do not result in no profits or even losses.
Apart from that, there is also a method of financial management that is quite well known and widely used by housewives in Japan, called kakeibo, which means ledger or household financial record. This method was first introduced in 1904 by a journalist named Makoto Hani. In 2017, this method was again popularized through a book written by Fumiko Chiba entitled Kakeibo: The Japanese Art of Saving Money. In this book, there are four important questions that must be answered if you want to have a better financial condition:
- How much money do you have?
- How much money do you want to save?
- How much money do you regularly spend?
- How can you increase the money you save?
Fumiko believes that the kakeibo method can change our view of money and make us more insightful in managing finances.
The steps that need to be considered when implementing the kakeibo method are:
Record all the income you receive at the beginning of the month, both from routine income such as a monthly salary and additional income.
Set aside the money you want to save that month.
Allocate the remainder into several expense items which are divided into four categories:
Survival or basic needs such as food costs, bills, installments and other obligations.
Optional or secondary needs include entertainment, eating out, and so on.
Culture or the need to increase insight, for example books, films, magazines, etc.
Extras or other expenses such as gifts, home repairs, motor vehicle maintenance, and so on.
However, you can adjust the expenditure items above yourself according to your needs, for example by making more specific divisions.
Prepare several envelopes to store the allocated funds from these expenditure items. You can choose envelopes in different colors, give each envelope a name according to the purpose of spending it. Don’t forget to record the expenses you make from each envelope.
At the end of the month, evaluate the financial activities you have carried out. Check which envelopes or postals save a lot and which ones cost more than your budget. By knowing this, you can adjust your budget for the following month.
If over time you manage to reduce expenses and save more money, it means you have successfully implemented kakeibo.
Nowadays, there are many ways to manage finances that we can guide from successful figures. Maybe in the past we only focused on working and making a lot of money, but didn’t understand how to manage the money we earned. Often we find ourselves running out of money at the end of the month without realizing where we spend the money. That’s why it’s important to manage finances, of course starting from managing our lifestyle. The decision to manage your finances also requires commitment and consistency with yourself. Whatever the method, of course it must be adjusted to your needs and priorities.