📊 10 basic concepts you must learn when getting started with financial management

🏁 Preface

Dear readers, in this age of soaring prices, "If you don't manage your finances, your finances won't manage you" is no longer just a slogan; it's a reality every Hong Konger must face! Whether you're a fresh graduate or a long-time professional looking to start managing your finances, mastering basic financial management concepts is the first step towards financial freedom.

This time, we've compiled 10 essential financial management concepts to help you build a sound financial foundation in the simplest and most accessible way. Remember, financial management isn't just for the wealthy; it's a life skill that everyone can learn!

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💰 First concept: clarify investment objectives and risk tolerance

Clarify your financial goals

Before you start managing your finances, the most important question is: "Why do I want to manage my finances?" Are you looking to accumulate your first pot of gold? Build a wedding fund? Or prepare for retirement?

Short-term goals (within 1 year) :

• Emergency Fund Reserve

• Tourism Fund

• Further education expenses

Medium-term goals (3-5 years) :

• Wedding Fund

• down payment for property purchase

• Car purchase funds

Long-term goals (more than 5 years) :

• Children's Education Fund

• retirement savings

• investment properties

Understand your risk tolerance

Financial management novices generally fall into three categories:

Conservative investors : Suitable for choosing low-risk products such as fixed deposits and bonds
Balanced investors : Consider a mix of stocks and bonds
Aggressive investors : Can tolerate higher risks and pursue higher returns

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📋 Second concept: Learn to keep accounts and manage budgets

Develop effective accounting habits

The editor recommends that you adopt the "50/30/20 rule":

• 50% For essential expenses (housing, food, transportation)

• 30% Used for non-essential "want" expenses (entertainment, travel)

• 20% For savings or investment

Distinguish between "needs" and "wants"

Before every purchase, pause and consider whether it's a need or a want. This simple habit can help you cut down on unnecessary expenses!

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🚨 Concept 3: Build an emergency fund

The Importance of an Emergency Fund

An emergency fund is like your financial safety net, protecting your basic needs in the event of unemployment, illness, or other emergencies.

How much should you save in an emergency fund?

General suggestion : 3-6 months of basic living expenses
Freelancers : It is recommended to save 6-12 months of expenses
Singles : 3 months of expenses is enough
For those with families : 6 months or older is recommended

For example, if your basic monthly expenses are $20,000, your emergency fund should be between $60,000 and $120,000.

How to store an emergency fund

• Demand deposits : The most liquid, but with lower interest rates

• High-interest savings accounts : balancing liquidity and returns

• Money market funds : low risk and strong inflation resistance

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⚡ The fourth concept: understand the power of compound interest

What is the compound interest effect?

The compound interest effect is the concept of "money making money". The principal of each investment is added to the return and then used as the principal for the next investment, just like a snowball that keeps getting bigger and bigger!

Practical Examples of Compound Interest

Assume Jack and Jill are two friends:

Jack : I started investing at age 25, investing $20,000 annually for the first 10 years, then stopped investing and just let the money roll over.
Jill : Started at 35, investing $20,000 per year until age 65

The results are at age 65:

• Jack's total investment: $200,000, final accumulated amount: $2,050,731

• Jill's total investment: $600,000, final accumulated amount: $1,421,461

Although Jack invested $400,000 less, because he started 10 years earlier, his ultimate return was higher than Jill's! This is the power of compound interest.

How to make good use of the compound interest effect?

1. Start early : Time is compound interest's best friend

2. Regular investment : Enjoy the compound interest effect through monthly stock or fund investments

3. Long-term investment : Give compound interest enough time to work

4. Reinvesting returns : Reinvesting dividends and interest instead of withdrawing them

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🎯 Fifth Concept: Mastering the Principles of Asset Allocation

Basic concepts of asset allocation

Asset allocation is the process of spreading your investments across different asset classes. The goal is to reduce risk and optimize returns. Remember the old saying: "Don't put all your eggs in one basket!"

Common asset allocation models

The 4433 rule :

• 40% stocks (growth-oriented)

• 40% Bonds (provide stable returns)

• 10% Gold (safe haven asset)

• 10% cash (to maintain liquidity)

631 Rule or 541 Rule :

• Living expenses: basic daily expenses

• Investment and financial management: used for value-added investment

• Risk Management: Insurance and Emergency Funds

5R principles of asset allocation

1. Risk : Understand the risk characteristics of each asset

2. Return : Evaluate the expected rate of return

3. Right Mix : Adjust the ratio according to your personal situation

4. Rebalancing : Regularly review and adjust configurations

5. Regular review : Make adjustments based on market changes

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🛡️ The sixth concept: Diversify your investments to reduce risk

The importance of diversification

Diversification is called a "near free lunch" because it can effectively reduce the risk of the overall portfolio without adding any additional costs.

How to effectively diversify investments?

Geographical dispersion :

• Hong Kong stocks

• US stocks

• Emerging Market Stocks

Industry fragmentation :

• technology stocks

• financial stocks

• medical stocks

• consumer stocks

Diversification of investment tools :

• Individual stocks

• ETFs (Exchange Traded Funds)

• mutual funds

• bonds

ETFs – A good choice for diversified investment

ETF (Exchange-Traded Fund) is a good diversification tool. Investing in an ETF is equivalent to investing in all the constituent stocks of an index, automatically achieving the effect of diversified investment.

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📈 The seventh concept: Understanding the impact of inflation on financial management

What is inflation?

Inflation is the phenomenon of rising prices and a decrease in the purchasing power of money. Simply put, what you can buy with $100 today may cost $110 in a few years.

How does inflation affect your wealth?

If your money is just sitting in the bank earning interest, and that interest rate doesn't keep up with inflation, your wealth is actually shrinking.

For example:

• Inflation rate: 3%

• Bank interest: 1%

• Actual return: 1% - 3% = -2% (this means your money actually loses value by 2% each year)

How to fight inflation?

1. Invest in stocks : In the long run, stock returns generally outperform inflation

2. Investing in real estate : Property values ​​generally rise with inflation

3. Investing in REITs : Real Estate Investment Trusts

4. Consider inflation-linked bonds : Returns adjust with inflation

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💳 Concept 8: Manage Debt Properly

Distinguishing between “good debt” and “bad debt”

Good debt :

• Mortgage loans (for purchasing assets that will appreciate in value)

• Education Loan (Invest in Your Future)

• Low-interest investment loans

Bad debt :

• Credit card count (high-interest consumer debt)

• Personal loans (for consumption)

• High-interest short-term loans

Basic principles of debt management

1. Prioritize paying off high-interest debt : Pay off credit card balances first

2. Avoid the minimum payment trap : paying only the minimum payment will cause interest to continue to accumulate

3. Live within your means : Don’t borrow more than you can repay

4. Building a good credit history : On-time repayments are crucial for future borrowing

Debt management strategies

Snowball Debt Repayment Method : Pay off the smallest debts first and gradually tackle the larger ones
Avalanche Debt Repayment Method : Pay off the debt with the highest interest first to reduce interest expenses

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🕐 The ninth concept: Seize the investment time window

Importance of time windows

An investment window is a specific period of time when market conditions have a particularly significant impact on investment decisions. Understanding this window can help you:

1. Improving investment returns : Entering the market at the right time

2. Reduce investment risk : Avoid investing at the wrong time

3. Optimizing investment decisions : adjusting strategies according to economic cycles

Investment strategies in different time windows

Short-term window (days to weeks) :

• Suitable for high-frequency traders

• Capture short-term market fluctuations

• Need to keep a close eye on the market

Medium-term window (weeks to months) :

• Suitable for trend followers

• Focus on medium-term market trends

• Balancing Risk and Reward

Long-term windows (months to years) :

• Suitable for value investors

• Focus on long-term market development

• Enjoy the compound interest effect

How to seize the investment time window?

1. Understand the economic cycle : the impact of economic expansion and contraction on different assets

2. Pay attention to major events : policy changes, economic data releases

3. Stay patient : Don't let short-term fluctuations change your long-term investment plans

4. Regular investment : Reduce timing risk through dollar-cost averaging

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🎓 The tenth concept: Continue to learn financial management knowledge

The importance of financial education

Financial management skills can be continuously improved through learning and practice. Just as the Jews believe that "financial intelligence should be cultivated from a young age," financial education is not only about wealth skills but also about character development and responsibility.

Financial Management Learning Resources

Official agencies :

• Investor and Financial Education Council (The Chin Family)

• MPFA financial education resources

• Hong Kong Monetary Authority

Financial Management Courses :

• 4S Course (Saving, Consumption, Investing, Sharing)

• Bank Financial Management Lecture

• University Continuing Education Courses

Useful tools :

• Financial management mobile app

• accounting software

• Investment Platform

Develop a habit of learning about financial management

1. Read financial information regularly : Spend 15 minutes every day to understand market trends

2. Attend financial management seminars : learn the latest investment strategies

3. Talk to a professional : Seek advice from a financial planner

4. Learning by doing : Starting with small investments to gain experience

5. Regular review : Review your financial plan every quarter

Advanced concepts in financial management learning

Tax planning :

• Understand Hong Kong's tax system (salaries tax, profits tax, property tax)

• Make good use of tax deductions

• Legal tax reduction planning

Insurance planning :

• life insurance

• Medical insurance

• Accident Insurance

• savings insurance

Retirement Planning :

• MPF Management

• Annuity Plan

• Retirement Investment Portfolio

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💡 Editor's Summary

While financial management may seem complex at first, mastering these 10 basic concepts will take you to the first step towards financial success! Remember, financial management is a long-term process that requires patience and perseverance.

The most important thing is to start today ! No matter how old you are, it's never too late to start managing your finances. Even if you only save $1,000 per month, you can accumulate considerable wealth over the long term through the power of compound interest.

I recommend starting with the simplest things like keeping accounts and building an emergency fund, then gradually learning about investing and building a diversified investment portfolio. Remember, financial management isn't something you can achieve overnight; it's a skill that requires lifelong learning and practice.

Finally, I'd like to remind everyone that the ultimate goal of financial management isn't to become a billionaire (though that's great if you can, 😄). Rather, it's to provide you and your family with a more stable and empowered life. Once you have a solid financial foundation, you can pursue the life you truly want!

I wish you all smooth sailing on your financial journey and may you achieve financial freedom soon! 💪✨