The Importance of Financial Management in Everyday Life

            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 of course everything requires money. Therefore, everyone is trying to work hard to make money. But which is more important, making money or managing finances? For example, there is an employee in a city who has an income of 7 million per 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 has a monthly income of at most 5 million each month. However, during the 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 more income have more assets?

            Talking about financial management, especially personal finance, is of course inseparable from lifestyle management. Like the previous examples of employees and farmers, the lifestyle of employees in urban areas is certainly different from the lifestyle of a farmer in rural areas. Apart from the cost of living in urban areas which tends to be more expensive, the needs of an employee and a farmer cannot be equated. A farmer certainly doesn't need to buy formal clothes to work, nor does he need complete gadgets such as laptops, smartphones and others. However, this is not solely the cause of employees' assets which are far less than those of farmers. With greater income, employees should be able to optimize their income more. For this reason, it is important for every individual to understand how to manage finances. There are also cases of someone who has more income but also has more consumer debt.

         In the book All Your Worth: The Ultimate Lifetime Money Plan, Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi popularized a 50/30/20 principle for managing finances. This principle is also in great demand by millennials who have started working and want to learn how to manage finances. This principle has basic rules for managing finances by dividing income after tax and allocating it to spend 50% for needs, 30% for wants, and setting aside 20% for savings.                                     

If we simulate with employees who have a net income of 7 million per month, then each month the employees have savings of 1.4 million. If accumulated 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 on daily needs, including entertainment.
• 10 – Save the first 10% of the earnings for your future fund
• 10 – Invest the second 10% of your income
• 10 – Distribute the third 10% to those in greater need.

            In this budgeting method, Jim Rohn allocates a portion of his income for investment and retirement funds. When compared to the Warren principle, from 20 percent of savings, Jim Rohn only set aside 10 percent to save and another 10 percent to invest in the hope that it will generate more income in the future. In deciding to invest, we must also have more advanced knowledge, lest the funds we invest do not provide profits or even lose money.

               In addition, there is also a financial management method that is quite well-known and is widely practiced by housewives in Japan called kakeibo, which means a ledger or household financial record. This method was first introduced in 1904 by a journalist named Makoto Hani. In 2017, this method was popularized again 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 in applying the kakeibo method are:

1. Record all settlements that you receive at the beginning of the month, both from routine settlements such as monthly salaries and additional income.

2. Set aside the money you want to save in that month.

3. Allocate the remainder into several expenditure 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 add insight, for example books, films, magazines, and others.
• Extras or other expenses such as gifts, home repairs, maintenance of motor vehicles, and so on.

            Even so, you can adjust the expenditure items above yourself as needed, for example by making a more specific division.

4. Create a number of envelopes to keep the money allotted for these expenditures. You can choose envelopes with different colors, give each envelope a name according to the purpose of expenditure. Don't forget to record the expenses you make from each envelope.

5. At the end of the month, evaluate the financial activities that you have done. Check which envelopes or posts have saved you the most and which have spent more than your budget. By knowing this, you can adjust your budgeting for the following month.

            If over time you manage to keep your expenses down and save more money, then you are successfully implementing kakeibo.

            Today, there are many ways to manage finances that we can follow from successful figures. Maybe in the past we only focused on working and making lots of money, but didn't understand how to manage the money we got. Often we find ourselves running out of money at the end of the month without realizing where we are using these expenses. For this reason, it is important to manage finances, of course, starting from managing our lifestyle. The decision to manage finances also requires commitment and consistency in yourself. Whatever the method, of course, must be adjusted to the needs and priorities.