Personal Finance: How to Manage Your Money and Achieve Your Goals
In this section we will present you with basic knowledge for managing your personal finances.
There are two main sources of income: income from work and passive income from assets. Income from work involves exchanging time for money. Passive Income involves income generated from a specific asset whether it’s a real business, investment portfolio or real estate property which generates recurring income after initial setup.
Your Final Goal: Multiple Sources of income
Your ultimate goal should be to gradually build and manage multiple streams of income. Eventually you should have recurring income in the form of consultancy or a high payed work, passive income from assets (investment portfolio, real estate property) and capital in the form of physical assets like your home and real businesses.
The most important formula related to wealth you should memorize is the following:
Value is the service you offer to other people perceived by them in exchange for money. Focus on developing products, services and ideas which serve others and are used to solve their problems.
The higher the value provided, the higher the price you should charge. The bigger the problem you solve, the higher the transactional amount.
Leverage is determined by the number of customers, ease of spread, and speed with which your service or product can be offered. The more people you can serve the more money you can make.
Your aim is to first build value and offer it to a small group of customers for a low price. Once you built reputation you can gradually increase your prices and scale to more customers using your network, existing reputation and the Internet.
Your Products & Services vs Human Needs
Maslow argues that humans have a series of needs, some of which must be met before they can turn their attention towards others.
Maslow classifies the needs that humans needs as follows:
- Physiological: breathing, food, water, sleep, sex, homeostasis, excretion
- Safety: Security of body, employment, resources, morality, family, health, property
- Belonging and Love: friendship, family, sexual intimacy
- Esteem: self-esteem, confidence, achievement, respect of others, respect by others
- Self-actualization: morality, creativity, problem solving, lack of prejudice
As a general rule of thumb businesses that serve the basic physiological and safety needs are the safest businesses to work or invest since they are immune to economic downturns and recessions. Businesses serving the rest of human needs are highly dependent on economic growth health. During recessions, many of these businesses fail leading to job layoffs and investment losses.
Cyclical and Defensive Sectors in an Economy
All businesses of an economy are classified in different sectors of an economy. There are two types of sector categories: cyclical and defensive sectors.
Cyclical sectors are sectors whose earnings are sensitive to economic growth whereas Defensive sectors are sectors whose earnings are not affected from economic growth.
For example clothing is a cyclical sector whereas food and beverage are defensive sectors. During economic recessions, cyclical sectors are hit hard while defensive sectors are less affected.
|Consumer Staples (Food, Beverage, Tobacco)
|Consumer Discretionary (Retail Products)
|Automobiles & Parts
|Oil & Gas Producers
|Oil & Gas Equipment and Services
|Pharmaceutical and Biotechnology
|Telecommunications (Fixed and Wireless)
|Utilities (Electricity, Gas, Water)
|Construction & Materials
|Industrial and commercial services
|Technology (Hardware & Software)
|Travel and Leisure
Your Income Strategy
Check below the steps you should follow based on your financial status to increase your household’s income.
Click on each link to find more information and tools provided by MacroVar to maximize your income based on your skills, knowledge and experience.
Since your current financial state is fragile, you should focus on finding a job which is offered by an employer in a safe sector and combines the highest paying salary with the lowest time of engagement. To learn more about which sectors of the economy are safe click here. The safest employer with the minimum effort required is the public sector.
The benefits of being an employee is the relative security provided, a path to grow your career, training and support and personal benefits like pension provision, illness and maternity.
The biggest drawback of being an employee is that your financial resources are linked to a single customer, your employer. If your employer decides to lay you off or goes bust you suddenly lose all your income. This is the reason why it is important to gradually diversify by increasing your sources of income. Another major drawback is the lack of flexibility. You can’t manage your time and your revenue per hour is fixed to your monthly salary.
Pick a High-Paying Job
Searching for a job
When searching for a job, you need to see this job-hunting process from the employer’s perspective. The employer will hire an individual in order to fulfill a company’s specific need.
Your objective is to find what they need, and convince them you are the best available person to meet tha need.
Searching for a job is easier than ever. LinkedIn, Indeed, Hired are three of the most highly profiled website to look for jobs. However, the best way to get to the best jobs is to take advantage of your personal network.
Moreover, your introduction letter, cover letter and resume should fulfill what a specific company is looking for.
Maximize your Benefits as an Employee
Your goal is to become indispensable in an organization. You must maximize your effort in order to get promotions and pay rises.
Here is a list of steps to maximize your contribution to an organization which will lead to the benefits you will receive from the organization.
- Identify by discussing with your boss or manager which are the goals and timeframes of your position which provide the maximum benefit to the company
- Identify and suggest revenue generating ideas for the company
- Identify and suggest cost cutting ideas for the company
- Manage your time efficiently to achieve the maximum output. Learn more about time management here
- Put the customer first and over deliver
Freelancer or Part-time jobs
Start earning money and solve your financial strain fast by offering your services in digital platforms.
The employment landscape is changing globally. Companies are shifting their operations from hiring full-time employees to hiring full-time or part-time contractors depending on the organization’s changing needs. 30% of the US population is self-employed.
Digital platforms connect buyers of services with independent workers. MacroVar will provide you with the knowledge and tools to take advantage of this huge trend to boost your income. You can use these platforms to find work and use them as your primary income or as supplemental income.
The benefits of independent working
Independent work has the following benefits for you: 1. You can start working instantly and earn income, 2. you get access to a large pool of clients, 3. The platform guarantees quick and reliable payment, 4. If you provide good services you build a reputation which will help you grow your future business, 5. since you have more than one client, your income is diversified and less dependent on one client.
The drawbacks of self-employment is harsh competition faced, you need to continuously search for new clients and you need to have discipline to manage yourself.
Use MacroVar Projects to monitor and get notified instantly on new projects posted on Upwork, Guru, Freelancer matching your profile. Use instant notifications to be the first to apply for a specific project.
How it works
The steps you need to get started are: 1. Sign up, 2. Create your profile, 3. Set up your payment option, 4. Search for projects suitable to your skills, 5. Start working and collaborate with clients using online message, 6. Get paid. You can setup your account and get started within 15 minutes.
Here is a list of steps to maximize income as an independent worker:
- Build a professional profile and constantly strive to develop your reputation and brand
- Be the first to bind on a specific project using MacroVar Projects service
- Follow MacroVar sales tactics and show professionalism and expertise to win new clients
- Start with a low hourly rate to be competitive and win new projects. As you complete projects successfully and your reputation improves increase your hourly rate to earn more
- Offer high quality services and over deliver
- Manage time efficiently to maximize your output
- Once your online reputation is high, try to leverage online platforms by building a business using online contractors
- Use your location as an advantage to attract clients looking for workers in the same city, country
- Cross-sell other related services to your existing clients
- Keep educating yourself, acquire new skills to expand your services
- Use some of the financial resources to develop your brand outside these platforms
Start a business
If you can provide a service like marketing, consulting or software development you can start your own company and scale it up. There are many examples of individuals which started as freelancers in Upwork.com and Guru.com and ended up forming big teams and reached revenues in the six figure range.
Use your assets
How to Budget
To control your household’s income and spending, you need to keep a budget. At the end of every month a budget must be prepared for the following month before the month begins. A written plan will help you psychologically to achieve your goals. A budget will also lower your stress due to financial strains since you will feel in control of your income and expenses. You need to start your budget now using our tools below because there is a saying “what gets measures gets accomplished”.
All members of the family must agree on the budget created. Your budget should agree with your long-term financial plan. Once you setup your budget plan, you should follow up closely. In this way, you will keep a close watch on your expenses and avoid impulse purchases.
Budgeting top priorities
Your first priority is to cover your living costs which are:
An introduction in Budgeting
The basic idea of a budget is to record at the end of every month all your income and all your expenses of your household for the following month. A budget is your plan specifying beforehand where money should go for the following month instead of where it went.
You should be very diligent in recording all income and expenses, and then sticking to the budget agreed on a daily basis.
For your budget to be functional you should consider the following:
- KISS: Keep it simple stupid – don’t overcomplicate your budget
- Follow it and update it closely on a daily, weekly, monthly basis
- Include all your expenses
A zero-based budget is to start with your household’s income at the top and then write all expenses for the month under it. Your income minus all total expenses should equal zero. If it doesn’t equal zero go back and readjust the expenses.
Your expenses should be structured based on your initial plan to get out of the financial crisis mode:
- Initially build a savings account with $1,000
- Once step 1 is complete, all the extra money left should be used for repaying debt
- Once debt is repaid, your savings account should be replenished with six to twelve months of expenses
- Once your saving account is replenished, extra funds will go towards investing
To manage your expenses correctly, split them in different expenses types and for each type (food, clothing etc) before the month begins setup up a direct debit or use a physical storage to apportion your funds accordingly.
Balancing your check book
At least once a month you should balance your checkbook. Balancing your checkbook means that you should record all additions (deposits) made to your account and subtractions (withdrawals). The purpose for balancing a checkbook is to know how much actual money you have in your checking account at any given time. Moreover, it prevents you from been charged overdrafts from your bank on your account. Overdrafts are the most expensive loans charged by banks having interest ranging between 19% and 40%.
How to Control your spending
Your spending will determine how fast you pay off debt and build wealth. Your priority should be to spend on your family’s living costs. What you need should not be confused with what you want.
SPENDING (WANT AND NEED)
Spending on necessities comes first for your basic survival. Many people are in debt so can’t even afford to cater for their basic needs without getting further into debt. This might be a lack of knowledge on the management of money, which is easy to fix, a current inability to earn enough, trying to keep up with the Jones’s or some emotional or deeper belief issues around money, covered in Section 4. Yet most people can actually live on a lot less than they think or have become accustomed and addicted to. ‘Need’ spending is often confused with ‘want’ spending. You need less than you think you need. Budget the amount you need for basic amenities for you and your family, and set it as your level 1 stepping-stone of financial stability.
‘Want’ spending is what keeps most people poor or turns them broke. It is spending on liabilities or perishables that decay in value and produce no capital or income residual. Wealthy people are susceptible to this too, especially people new into money. According to Scottish Widows, 9 million people in the UK have no savings at all.2 That is around 15 per cent of the population. According to a More study, 33 per cent humble living expenses for a couple). Twenty-one per cent of Americans don’t even have a savings account, and 62 per cent have less than $1,000 dollars in savings.
The biggest difference between the rich and poor is that the sustainably rich ‘spend’ (invest) money on assets that produce (passive) income and preserve their capital. They then spend income that is residual and gets replaced by the asset, on liabilities and perishables. They preserve the time and capital, and money that recurs is used for spending, allowing the capital to grow. Set your ‘need’ spending level, then minimize your ‘want’ spending until you have savings and assets that produce buffers and income.
Buy (LIABILITIES) LOW
Anything that goes down in value will erode capital. Capital should be preserved at all costs. Many of your non-essential items can be bought secondhand.
Turn spending habits into investing habits
If you can turn much of your spending habits into investing habits, you will make 80/20 compounding work for you, save and make possibly hundreds of thousands or even millions, and have a valuable life skill most don’t have. Think of every material item you buy as a liability-cash-drain, and apply an investor mentality to each purchase.
- Step 1. Can I get by without it?
- Step 2. Can I buy it secondhand at the bottom of the depreciation curve?
- Step 3. Can I turn it into an asset?
- Step 4. Can I sell or exchange it before it drops in value further?
- Step 5. What’s the lowest cost method of finance?
COST OF CAPITAL AND 15-YEAR IMPLICATION
All spent or invested capital has a potential ‘opportunity cost’ of being spent, in that it could have produced a better return elsewhere. Many people consider cost of capital when investing, but not when spending. You will see in a moment how dramatic and significant saved capital can compound, so consider the cost of future earnings when spending money. If you take that one step further and look at the 15-year cost of capital implication, then the numbers get so big that even small savings will look worthwhile.
Your spending will determine how fast you pay off debt and build wealth. Your priority should be to spend on your family’s living costs. What you need should not be confused with what you want. Your family needs less to live well than you actually think you need.
The biggest difference between wealthy and poor individuals is that the rich spend money only on assets that produce income and preserve their time and capital.
Spending on wants like cars, electronics is what makes people poor. These assets decay in value and produce no capital or income residual.
Your first step should be to budget the amount your family needs for 1. Food, 2. Home, 3. Clothing and 4. Transportation. This is your first level to achieve financial stability. Once you set this, you should minimize what you want in terms of luxury spending until your savings and assets produce enough income to purchase your wants.
10 ways to control spending habits:
- Based on your monthly budget, set the maximum amount you can spend on a specific item
- Only use cash or a debit card for purchasing
- Compare prices online or in other shops before purchasing
- Check the product or service, go home and rethink whether it’s worth spending
- Think of the opportunity cost: before spending it, ask what else can I do with that money?
- Pay cash to negotiate
- Be patient
- Be willing to walk away
- Negotiate everything to get the best price
- During negotiation don’t talk too much, just listen
While spending think like an investor
Think of every item you want to purchase as a liability and apply investing mentality for each purchase. Think according to the following steps:
- Before buying ask first Do I need this? Can I live without it?
- Can I buy it secondhand, and avoid the depreciation?
How to Pay off Debt
Your first financial goal should be to get out of bad debt fast. From now on never spend more than you earn. Remember that the borrower is the slave of the lender. You will have to work forever in order to pay off these debts. You won’t be able to make your own decisions.
Your Debt payoff goal
Your aim is to pay off debt (excluding your primary mortgage) as soon as possible and once you are finished, you can then focus on building wealth by investing excess savings built. Your aim would be to get debt free within two years.
- Create a budget and set pay off debt deadlines
- Stop borrowing more money today
- List and pay off your debts starting with the most expensive
- Increase your income
- Reduce your spending
- Use your existing assets
- Consolidate debt
1. Create a budget and set pay off debt goals
To control your household’s income and spending and pay off debt, you need to keep a budget. At the end of every month a budget must be prepared for the following month before the month begins. A written plan will help you psychologically to achieve your goals of debt repayment. A budget will also lower your stress due to financial strains since you will feel in control of your income and expenses. You need to start your budget now using our tools below because there is a saying “what gets measures gets accomplished”.
2. Stop borrowing more money today
The first step is to stop borrowing more money using credit cards, short-term loans or any form of debt. Another important step is to remove your credit cards from your wallet and stop using them from now on. From now on use only debit cards for any of your expenses.
3. List your debts ordered by interest rate and start paying them off step by step
List all your debts except your primary mortgage from the most expensive debt in terms of interest rate paid to the least expensive debt. Set a target date for each debt, and put in as much disposable income so you can get rid of it quickly. The main idea is to build momentum and get moving fast. Focus to repay the first debt and once this is done move to your next enemy.
4. Increase your income
To pay off debt fast you will need to use all your household’s resources to maximise your income. Learn more on how to increase your household income here.
5. Reduce spending
Keep your budget updated, review your expenses every month and reduce your spending. Your priority should be to spend on your family’s living costs. Your first step should be to budget the amount your family needs for 1. Food, 2. Home, 3. Clothing, 4. Transportation and 5. Debt repayment. This is your first level to achieve financial stability. Once you set this, you should minimise what you want in terms of luxury spending until your savings and assets produce enough income to purchase your wants.
6. Use of your Assets
Use the Internet to sell any stuff you don’t currently use. You can also find value in any of your assets you haven’t think of. For example, you could rent a space of your home which is not currently used. Sit down, list your assets both physical and non-physical and think of ways to sell, rent or use your assets to create extra income.
7. Consolidate Debt
When interest rates are low, consolidate your debt, renegotiation payment holidays or take longer loans with smaller repayments.
Don’t use your 401(k)
Do not use your 401(k) accounts to pay off debt, since cashing out a 401(k) early incurs taxes and penalties which can lead to losses of 40% of your money.
Einstein said “Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t pays it”.
Debt compounds that is why you need to take control as soon as possible. If for example you have a loan of $1,000 that compounds weekly and carries a 10% interest, you pay 1/52nd of 10% each month.
The balance of your loan changes as the deposit or debt compounds. At the end of the first week the balance of your $1,000 loan has become $1,002. The interest charged on the second week will be calculated based on the $1,002 balance not the initial loan’s value of $1,000. Hence the interest added during the second week would be $1.927 instead of $1.923.
Since the balance changes as your debt compounds, the amount you owe 10% increases with each compounding period, so you end up paying more than if the loan compounded only once a year.
How to Save Money
When it comes to saving money and building wealth nothing is more important than discipline. Putting money away every month, year after year. Wealth building is a marathon not a sprint.
The first stage of mastering money management is saving. Saving is the foundation of building wealth. There are three reasons to save money:
- 1. Save for Emergencies and unexpected shocks
- 2. Save for big purchases
- 3. Save for building wealth
How to save money
Step 1: Pay yourself first
Most people make the mistake of getting paid last. Instead, start by setting up a standing order for money to go into two different accounts on payday: (1) your savings account and (2) your spending account.
Even if you are a little short on your obligation you will find ways to earn some income to make the difference.
Step 2: Increase your Income use your Family’s full capacity
The fastest and easiest way to boost your family’s income is to use on part-time projects. Use MacroVar Projects search engine to find and apply for the best projects suited to your skills and work as an independent worker.
Alternatively, you can use online marketplaces for part-time work which can add supplemental income to your household. Other members of your family can contribute with supplemental income as well by working in online marketplaces.
Step 3: Reduce Spending
Spending on necessities comes first for your basic survival. Yet most people can actually live on a lot less than they think or have become accustomed and addicted to. ‘Need’ spending is often confused with ‘want’ spending. You need less than you think you need. Budget the amount you need for basic amenities for you and your family.
Think of every material item you buy as a liability-cash-drain, and apply an investor mentality to each purchase. Follow the procedure below:
- 1. Can I get by without it?
- 2. Can I buy it secondhand at the bottom of the depreciation curve?
- 3. Can I turn it into an asset?
- 4. Can I sell or exchange it before it drops in value further?
- 5. What’s the lowest cost method of finance?
Step 4: Create a separate saving account
Create a separate savings account and start by saving $1,000 fast in this account. This account will only be used for emergency cases. Once your savings account is filled and you are in the process of paying off any outstanding debt, you can fill your savings account with an amount to cover six to twelve of your household’s expenses. This is to safeguard you in case your income suddenly stops. This is the amount required to pay your bills for six to twelve months.
Step 5: Money bucketing
Create ‘buckets’ set up as your direct debits to apportion gives you a system to grow your wealth. Below are the buckets you could set up, even with different bank accounts. The percentages suggested are starting points. As you grow your wealth the expenses bucket will reduce and the others will grow.
- 1. Save and Never touch: 5%
- 2. Irregular shock savings: 5%
- 3. Savings for future life goals: 10%
- 4. Investing in Acquiring new Skills: 10%
- 5. Investments: 15%
- 6. Living Expenses & Taxes: 55%
Step 6: Bank Account Management
Manage all your funds online, by settings online bank accounts and monitoring the money flow between your accounts, payees etc.
Step 7: Cash preservation
Build capital reserves to anticipate any unexpected big expenses. Set a target amount and use that as your new imagined zero. Build on that with capital to invest, and never dip into your reserves, letting them grow larger and larger.
Setup an emergency fund
An emergency fund is a savings account to cover for unexpected events. Create a separate savings account and start by saving $1,000 fast in this account. This account will only be used for emergency cases. Once your savings account is filled and you are in the process of paying off any outstanding debt, you can fill your savings account with an amount to cover six to twelve of your household’s expenses. This is to safeguard you in case your income suddenly stops. This is the amount required to pay your bills for six to twelve months.
Your emergency fund is an insurance to keep your family afloat in case of emergency and a sudden loss of income.