Money Management Fundamentals and All that Jazz

The Role of Happiness

It shouldn’t be surprising to know that money management and financial health are pegged to your long-term happiness. You have to understand the things that make you happy. How do you define contentment? What is having enough for you? A conservative view of money management is about holding back and force yourself to save regardless of your income. However, if this is done in isolation (you save without a long-term goal), your savings will surely be spent elsewhere.

To be able to save successfully and with utmost discipline, you have to really know what you are saving for. Sure, you might be saving for your healthcare, insurance, etc. But you should be saving because you are inspired by your goal. Before you engage in a meaningful money management program and financial goal-setting, you have to look closer to what makes you happy and content—both in the long- and short-terms.

For example, you are not putting in your savings for healthcare just to prepare for sickness, you are preparing for your long term health. In plain terms, without happiness, money management becomes tedious

The following money management principles would make more sense if you peg your actions to your long-term happiness.


The Infographic of your Wealth

Presented as a line graph, the X-Curve maps out a person’s financial standing as he/she becomes older. The concept principal theory is that a person’s responsibilities (rent, food, electricity, and other such expenses) will generally decrease as wealth generally increases over time. Thus, the goal for any person to keep adding their assets and passive income to decrease the weight of their financial responsibilities as they get older.

The X-Curve is also a map of the person’s financial condition. The graph can then be separated into two. The first half indicates the younger years, while the second, the older years. The younger years exhibits the financial standing of the person—does he have a lot of responsibilities and the level of his/her wealth. The graph is important to enable the individual to prepare for the worse by asking what if I die too soon? How do I help my family in this case?

The second half is asking the question: What if I live too long? How can I earn money after retirement years? As a result, the X-Curve concept also happens to be a form of encouragement to turn people from spenders to savers. And the map will show whether one’s financial standings improve over time, depending on how much savings and investments they have made.

With this, the X-Curve concept is accompanied by the Prosperity Formula, which goes like this: Income minus savings (first priority) minus expenses (second priority) equals the excess money that can be used to build your assets and savings.


The Six Steps to Financial Security

With a number of investment vehicles that are often advertised, the would-be investors scramble around and cherry-pick those that they like the most. The common route is to put your money in real estate investments, stocks, and other high yielding financial instruments.

But there is an order for investments. There are priorities that must be considered. Just as a house needs a strong foundation to stand, financial planning and money management should also be built from the ground up. Otherwise, a wrong investment priority can put a person’s financial establishment tumbling down

  1. Increase Passive Income by Setting up Multiple Streams

To improve your financial standing, you have to look at making passive income from multiple sources, rather than from a single source. Diversifying your income stream is crucial to protect yourself and your family against the unavoidable ups and downs of economic and industry cycles.

  1. Debt Management /  Settlement

Before you proceed with savings and investments, you should work harder to settle your remaining debts. Otherwise, debts bite back in due time. Debt Management is about prioritizing your debt so that your savings will not be hindered further by creditors. Two strategies are often utilized in debt management: settlement and consolidation.

In Debt Settlement, you negotiate with your creditors for a way out. If that doesn’t work, you take out a new loan to pay off the ones you already have, the new loan must have lower interest rates. Debt management is also planning ahead by paying more than the interest rate so that it will not catch up to you, and therefore shortening the paying period. The faster you get out of debt, the better.

  1. Emergency Funds

Emergency funds are money that is liquid and available to you during a crisis. A quick formula for this short term savings is 30%-40% of your annual income. However, determining the real amount of emergency fund is about calculating your minimum monthly expenses, your income volatility, your income immutability, and your liquid savings.

  1. Ensuring Protection

Remember that achieving financial security through money management is all about protecting your happiness and your comfort. From a practical point of view. Your health is the first thing you need to secure towards happiness. Medical costs are often considered to have the highest inflation rate. Without long-term care protection, expenses associated with assisting in the activities of daily living can drain – and sometimes even deplete – a person’s entire estate, potentially putting family members into debt.  Long- and short-term healthcare shields you from costs that wipes out your savings clean. Insurance also protects you from costs and ensures that you get your money back after a set amount of time. Insurance works by buying a policy and make regular payments, known as premiums, to the insurer. If you make a claim, your insurer will payout for the loss that is covered under the policy. There are many types of insurance. Life insurance is those that are for premature death, sickness, and income during retirement; and General insurance prevents you from incurring property damages.

  1. Long Term Asset Accumulation

Investments are commonly understood as stocks, real estate, Forex, and bonds. They come only as a fourth priority after the individual has secured more important steps in the list. Long Term Asset Accumulation is gaining passive income over time to increase wealth and decrease responsibility as you get older.

But before you get into this, you need to understand the dynamics between risk and reward. The greater the risk, the greater the reward, and vice-versa. The key to developing a sound portfolio is to strike the right balance between potential reward and risk, based on your financial objectives, financial situation, and investment style. Thus, we have arranged investment types according to the amount of risk that an investor can stomach and the amount of capital he can produce for that investment: Mutual Funds, Stocks, Real Estate, Forex, and Bonds. A mutual fund pools capital from investors and invests their money in stocks on their behalf. Stocks are an equity investment that represents part ownership in a corporation and entitles you to part of that corporation's earnings and assets.

Real Estate or housing investments shows its advantages in making a down payment on a house, leverage your capital, and thus increase your overall return. Foreign exchange, or Forex, is investing in the increase or decrease of the currency’s value. Bonds investment is one of the most profitable of all investment types.  A bond is a debt security, similar to an I.O.U. When you purchase a bond, the government or business is essentially borrowing money from you. In case they go bankrupt, you get first dibs as a creditor.

  1. Estate Planning

Estate Planning is the last and final step in securing your finances. The sixth step anticipates that the planner had followed all the first five steps and is now enjoying the fruits of financial security. And now, you must preserve your assets.  This critical step ensures that your children will inherit your estate and protect what you have built. A proper estate plan can take care of your children during one’s life and after your death.

And All that Jazz

And so we return to the idea of happiness. In the end, financial security is about contentment and being secure. It’s a like jazz virtuoso. Left alone, he’d just play the tunes he wants and not a care in the world. He’s lost in his own art and not falling into the trappings of audience expectations. In the same fashion, the financially secure person lives the way he wants because he laid the foundation that put him there. So aim to be like the jazz player. By holding on to your long term happiness, you can shore up the grit to follow these steps. So that in the end, you play your own music without compromise.