Business

Basic knowledge of effective fund management

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Managing money is important because it helps solve many problems and creates opportunities for you. If you earn, make sure you also have the bill. Then you have to invest while trying to beat inflation; there are many things to do.

As you read, I have been trying to manage my own money; everyone has it; we struggle because we are human and therefore irrational. Good money management starts with changing our consumption behavior and using our money to make better decisions. Therefore, I want to share with you the financial management skills I use when making prudent fund management decisions.

Develop good financial management habits

First, determine all sources of income and pay them to the bank. Money management must first ensure that you take all income into account. Automate your income receipt. Pay wages directly to the bank account. If you have passive income, don’t accept cash; instead, pay to the bank. If you receive passive income from holding stocks or bonds, please automatically pay your dividends and coupons to your account instead of your post office.

You can have two receiving bank accounts, one for active income and the other for passive income. All you need to do is track your source of income. Collecting income is an essential first step. For technology, I use Personal Capital® and Mint® to track my income and balance sheet.

Next, pay yourself (PYF) first. It is essential that the first expenditure in your income should go to you. Therefore, choose the minimum income percentage for the emergency fund and investment portfolio.

Your emergency fund is your non-discretionary expenditure for three to six months (you cannot decide for yourself whether to pay, such as rent). First contribute to this. Maintain your emergency fund in the form of cash or close to cash; return is not an important factor here, but how quickly you can use your funds in an emergency. The following deductions under “Pay Upfront” are your contribution to the portfolio. Remember, this is not your employer deducting from your total income, but the extra amount you want to contribute to your investment portfolio.

Likewise, automate these expenditures. Once your income is deposited into your bank account, it will be deducted from your bank account and credited to your dedicated emergency fund investment account.

Next, you pay non-discretionary expenses. These expenses will include rent, insurance, tuition, etc. These fees are paid automatically from your bank account, so you will never be late. If you have a credit card, please pay from your card and repay the credit card immediately. Using a credit card allows you to maintain a good credit score because you can obtain and repay credit. It is also recommended that you purchase a card that provides your usage privileges. Therefore, when you make a payment, you can get cash back and even miles from the card issuer.

Next, you pay your salary. Your salary is not the total amount paid by your employer. Instead, I treat your salary as your total amount minus your planned PYF and non-discretionary expenses. I pay my salary by depositing my daily expenses on food and gasoline on the Acorn® card, and I try not to use cash. This allows all expenses to be tracked, but the Acorn® card will also collect my change and automatically invest in my stock portfolio.

Next, I pay the discretionary expenses. All other expenditures under my direct control, including vacations and new shoes, are at my discretion. This is where I can decide to spend, because I know I have paid all the necessary expenses. Even if expenses are not automated, you must use cards instead of cash to track your spending categories.

Don’t try to pay your fees manually. Automate as much as possible. Automation eliminates the emotions in money and also eliminates irrationality. If you are in an emergency, you can use emergency savings, but you cannot delay payment.

Automation can also help you provide data to prepare cash flow forecasts. By looking at your income and expenses, you can see the surplus and deficit of payments. The deficit in non-discretionary spending is a serious red flag and must be resolved immediately. Reducing short-term deficits may mean that you need to withdraw large amounts of savings in a short period of time, or you may borrow cash today.

However, if your deficit is not short-term in nature, then borrowing is not advisable. The solution should be to increase your income or reassess your expenses.

All in all, if your income cannot cover your non-disposable expenses, please do not borrow cash for a long time, because you may fall into a debt trap. Instead, reassess your overall situation.

There is a tendency towards discipline in managing funds, but it doesn’t always work. It is recommended to use technology to manage your cash, avoid debt and track expenses. Technology keeps you honest and promotes better money management.

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