Personal finance definition
According to the simplest understanding that you can learn, personal finance is the application of financial principles to personal or family money. Personal finance will be related to common financial issues such as spending, income, investment, saving…
Or you can also understand personal finance is the most effective use of money. It both helps you to live comfortably while avoiding unnecessary risks from everyday life.
Personal finance is a term for personal money management, savings, and investment; This includes budgeting, banking, insurance, mortgage, investment, retirement planning, tax planning, and estate sharing wills. The term also often refers to the entire industry that provides financial services to individuals and households, as well as advising them on financial and investment opportunities.
The purpose of personal finances is to meet personal financial goals, such as having enough money to pay for short-term financial needs, planning for retirement, or saving children for college. . Everything depends on your income, expenses, living requirements, personal goals, and desires – and devising a plan to meet those needs within your financial limits.
But to get the most out of your income and savings, it’s important to be financially savvy, able to differentiate between good advice from bad advice and make an informed decision.
Why is personal finance important?
As definition can be seen the importance of personal finances to individuals and households. Therefore, personal financial management will also be extremely important. Once you manage your finances well from controlling your spending to controlling capital and investment channels, while minimizing and minimizing the risks you can face in life, you and your family will quickly achieve the desired level of financial freedom. At that time, you will have a relaxed life without worrying about financial pressure.
7 lessons on personal finance from COVID-19
1. Always backup for the worst situation
The best lesson from COVID-19 is probably this: In life, nothing is certain. You may have a steady job, make money, have a chance to get a promotion, but that doesn’t mean it will last; Just an economic shock, a job failure, or a leadership change, you can lose everything. So, there’s always a back-up for the worst-case scenario.
Whether you are single or married, you must save yourself an emergency fund at all costs (at least 10 million VND up to 3-6 months of basic living expenses) so that when you get stuck debt, starvation, homelessness. Always live below your income level so that you can have the surplus to save, pay debts, and invest. Try to get at least 1 part-time job so that if the main job is lost, it can still survive with another source of income. Read more tips to save money in “Set For Every Money You Save One Purpose”.
Although COVID-19 made my family lose an economic resource, since we have a habit of living with only 30-50% of the income (saving at 50-70% / month), it is not too difficult to balance daily spending. Also, since we always maintain savings account with at least $ 1,000 (according to financial expert Dave Ramsey), we always feel assured that if the situation is difficult, it will not be so cruel. Fortunately, we have not had to deal with this emergency in the last 6 months!
2. Expense management is the ultimate important
Budgeting is paramount in all circumstances, but especially during difficult economic times. If you do not know where every dollar you earn has been and is “going where” it is very difficult to plan for the future when faced with a large economic deficit.
In my opinion, managing spending with a “zero-based budget” is the simplest and most optimal method. My wife and I have been following this method for almost 4 years now and it has changed my family’s financial life completely. Read more about the zero-based budget here.
3. Maximum limitation of all types of debt
Right. I mean all kinds of debt, including friends-relatives debt, bank debt, business debt, credit debt, and home and car installments. All, all types of debt need to be limited to the maximum possible and pay off as soon as possible.
Every time I mention the topic of repayment, it is like someone will comment: “But the giants always borrow money from the business to make more money”, or “Who doesn’t borrow money to buy a house? “, Or” It’s okay if you borrow a loved one without interest “… I hope everyone has learned a bloody lesson through this economic crisis.
The reason COVID-19 makes small businesses miserable and puts many people at risk of losing their homes and families being torn apart is that people owe more money than they can afford. If the economy goes up normally, it is okay to borrow one and beat another and have money to repay interest. Also, if there is market volatility, illness, job loss, or currency failure, it will be extremely, extremely deadlocked.
Right in my next neighborhood, the couple’s monthly salary combined is quite high, about $ 10,000 but the mortgage plus taxes has reached $ 6,000 (60% of income, while financial professionals always advise money. house should only be at 20-24% of income after-tax). As soon as the wife loses her job because of COVID-19, the whole family suffers because of her husband’s salary, he cannot afford the rent, let alone living expenses.
They had to stop paying their rent for 4 months and cried every day because they were worried about losing their house when the bank came to tighten their debt. Fortunately, eviction in the US is currently on hiatus and there is some housing assistance available to people who have lost their jobs so my neighbors are not on the street yet. But as long as the policies expire, they lose nearly everything.
So avoiding debt or minimizing borrowing and paying as soon as possible is the only way to “settle down, get lost in karma”, to be assured with your life. Read more about the two best repayment methods here.
4. Investing in the long-term stock market is the best way to create passive Income
Contrary to popular belief that the stock market is very risky (especially during the current economic crisis), I have a completely different experience from the long-term, stable index investment. fund (an index investment fund). When COVID-19 exploded, the market plunged very quickly, causing people to panic selling shares, withdrawing money; My portfolio itself lost $ 2,000 in just one day. However, since my investment method is long-term, focusing on index funds, I continue to invest steadily during the past time. So far, not only has my portfolio recovered, but it has increased by 38% from the time before COVID-19.
After years of reading, investing, and researching the US and international markets, I still believe that long-term stock investing is the best way to generate passive income — that is, when you do nothing. even then, the money continues to “work” to make more money. Of course, investing anywhere is risky (even if you don’t invest anything, hide your money under your pillow, there is also an inflation risk) but investing in securities is still considered one of the first forms of investment. investment in modern society.
*Index Fund: Contrary to the form of picking and investing in individual stocks (as we often see characters on Wall Street howling in front of dozens of red and green computer screens like in American movies), the index fund is A portfolio of stocks and bonds is aggregated with a portfolio built on the trend of the index (index) of the market. Because it is a combination of many types of stocks, investors do not take time and energy to research and choose each type of stock and are not too affected by the market ups and downs of the companies they choose. private.
5. Need to open independent money channel with online factors
COVID-19 has probably taught many businesses as well as workers the importance of online business.
For businesses, even when doing business well, it is still necessary to have a website (or at least listing on Google) and an online account via Facebook, Instagram, Yelp … so that customers can find themselves easily online and order online when not able to directly purchase.
For employees, depending on a single, fixed-job, normal office hours are no longer absolutely safe. These days, if you want to diversify your income, online business is a very good independent money-making channel for dynamic people. An online business can be in many forms such as selling via Facebook, Instagram, Shopee; teaching through Zoom; Blog / YouTube …
6. Taking responsibility for the government’s incentive and supportive policies
Faced with a major crisis in both public health and the national economy like COVID-19, every government has preferential policies to support people such as: distributing social benefits (USA, Canada ), increase unemployment benefits (the US, European countries), and lower bank interest rates (many countries). This policy information is always posted publicly on the mass media. Our mission is to keep up-to-date with accurate information and quickly find ways to make full use of these policies to bring us valuable economic benefits during times of hardship.
For example, when bank interest rates drop, what should we do with our loans and savings? Suddenly unemployed, what to do to receive unemployment insurance money? How to receive social assistance money? … Questions like these we need to ask ourselves immediately and find the answers as well as the earliest action direction to take advantage of the golden time with policy endow.
At a time when my husband was forced out of work because of COVID-19, I went online every day to read information about US health, politics, and economics As a public policy learner, I knew for sure what the government had to do. it’s urgent to stabilize the economy. So, when my state issued a policy to support unemployment for people who lost their jobs because of COVID-19, I got the information via Twitter within a few hours of the announcement and texted my husband to do a profile. Fortunately, my husband worked on it quickly and sent the resume that day; because it was only the next day that the state homepage was “down” with so many people signing up. Also thanks to the early filing in the state, my husband continued to receive federal money, making his average post-unemployment income even higher when he was working (!).
A lot of people I know or do not pay attention to or know the information but hesitate to file, causing loss of opportunities, money is not worth it; when I couldn’t stand it anymore, I asked everywhere to send the documents, it was too late and was greatly delayed. Therefore, in difficult times, it is very necessary to grasp information on preferential policies and take early action to take advantage of opportunities.
7. The only way to fully on money is financial independence
Finally, COVID-19 made me realize more clearly than ever the importance of Financial Independence (FI: Financial Independence). When and only if we have enough savings and investments to live the rest of our lives worry-free (calculated by 25 times the annual cost of living according to the 4% rule) will we reimburse peace of mind about money. Read more on this topic through the FIRE Trending series (Financial Independence, Retire Early).
I have known FIRE for a long time, but never shared it on the blog, and thought that I would start FIRE at the age of 30. It was not until COVID-19 happened that I changed my perception and determination to implement FI / FIRE. I also hope that you have been inspired to implement FI / FIRE through the blog post and the economic and financial reality between the COVID-19 era.