Wednesday, February 18, 2009

Personal finance distilled

You know, I've been reading a lot of books on personal finance. But after reading a great variety of them, you'll get a rough idea of what most of them advocates. I'll attempt to summarise those few pointers that I get from reading all these books (don't ask me which book mentions what, I seriously can't remember).

1. Know your expenses well.

This is very easily said, but hard to follow. I've been tracking my expenses for more than a year already, so everytime I spend money, you'll see me whip out my handphone and key in the amount so that I can tally up to my spreadsheet. Initially I wanted to do it only for a few months as I thought it's quite insane to do this, but after a while, it began to look like a sort of game. Every month, I'll tally up and see how the graph looks like, thus motivating me further.

The graph above shows my own expenses vs income for last year 2008. The difference between the blue (expenses) and the red (income) is my savings. That is extremely motivating for me to see my savings growing more.

2. Pay yourself first

This is more for people with fixed salary. Most books will recommend people to save up a portion of their salary and deduct a fixed percentage of say 30% into another 'untouchable' account. The rest, they can spend it to pay for bills and their monthly expenditures. This is essentially a forced savings, somewhat like CPF, except that you have more say on how much you want to contribute.

For variable income people (like me), what I do is that I'll put into my 'untouchable' account as soon as I have a sizeable amount. For example, if I have more than 1.5k in my bank, I'll put in 1k into that untouchable account. This requires more active managing, because I have to think about the near term cash outflow. I do not ever want to withdraw money out of the untouchable account unless absolutely necessary, so if I didn't plan out properly, I'll run in short term cashflow problems.

This kind of savings is significant. If one takes home a pay of $3,000 and pay himself 30% first, he'll get $10,800 in a year, excluding interest. Do not belittle it. It'll be even more if he pays himself 40% first, amounting to a huge sum of $14,400 in one year.

3. Identify your needs and wants

This comes as a result of first knowing what your expenses are, from step 1. If you do not know how much you spend on what, it's hard to audit your expenses to manage it better. It's important to identify your needs and wants because wants are not necessary.

Usually before I buy something, I'll have an intense desire to get it straightway. There's no point in reasoning out because the reasons will always expand to fill the desire. What I'll do is that I'll cool myself off for a time period, then if I still think I have to do with it, I'll go and buy it. For my accoustic guitar, I've been toying with the idea of buying it for almost 2 years. It cost slightly less than $300. For a CD that I really like, maybe I'll delay buying for up to 6 months or more. If I still like it, I'll get it.

Can you delay your gratifications, sometimes indefinitely? That being said, one must not feel deprived for doing without it. Enough is a balancing point between too much and too little.

4. Understand and manage your debts

Don't get yourself immersed in debts. Certain debts are good and others are bad. If you want to buy a car, but you can't have the money, so you borrow 100% of the amount and pay off in 10 yrs - that's very bad debt. How does one differentiate between good and bad debts?

For me, I classify things into assets or liabilties. Things that allow me to increase my money are my assets. Things that suck in money from me are my liabilities. For example, I would like to buy a car so that I can work harder and faster. With my own sets of wheels, I can save a lot more time, reach places a lot faster and probably squeeze in a few more work. It's more than worth the cost of the payment. Here, I'm borrowing to leverage on time.

For those that depreciate in value (like car or a washing machine), it's not wise to borrow money to pay for it. Some people I know borrow money for renovation, wedding, television sets etc...those are really bad debts.

5. Earn more money

I've seldom read books that tell you this thing. Earning more income is possibly the best way to save (i.e. if you don't spend more to 'reward' yourself too). There's plenty of ways to earn more - do a better job and try to get promoted or teach some skills that you can do very well. Most will probably choose tuition as it's easy and provides a healthy cashflow. With one student, you can possibly bring in an extra $200-$300 in per month, instead of lying in the sofa watching tv on weekends. How about teaching roller blades, cycling, swimming, baking etc?

6. Have adequate insurance

I've known people with less than adequate insurance. There are many insurances one can buy, ranging from:

1. Life insurance (death benefit)
2. Critical illness (like heart attacks, cancers, strokes etc)
3. Hospital and surgical insurance
4. Accident plans (can include things like dengue fever)
5. Elderly care (for those who are old and have problem fulfilling some basic acts of being a healthy independent human being)
6. Disability income (if you can't work because of disability, you'll get an income for a period of time)

Different life stages will require different kinds of coverage. For my life stage, I'll probably need more critical illness, hospital and surgical insurance and perhaps death benefits. The thing about insurance is this: it's equally bad to over insure and to under insure. If one over-insures, he is paying a lot more money than needed for the possibility of a claim event happening. If one under-insures, he have to folk out more money in the event that something happens. Both are equally not optimum. But from what I see, it seems there's less possibility of people being over insured, haha

What's the purpose of insurance? It helps to pass some of the risk to others. Can you afford to pay for $XXX,XXX in the event of cancer striking? If you can't fork out the amount of money, it's better to pay $X,XXX per year for a limited amount of time in order to pass the risk to others. As simple as that.

This issue about insurance deserves an article on its own, so I'll stop here. For now, it's suffice to say that without proper insurance, all the savings you've built up will be wiped out. Such events might be rare, but it's possible and probable. If you've read Black swan theory, it's always these exceptional circumstances that will have significant impact on your lives, so prepare yourself for it.


Createwealth8888 said...

Alternatively, one can consider monthly and yearly Expenses Budgeting. One determines how one will spend in the coming year by providing a monthly budget and track the spending and the budget closely. If it is clear that it is likely to be over spend, one will then tighten the spending to ensure that it will not over spend. Any leftover in the monthly budget will be keep in a special account to give oneself a special treat when the time comes.

Life is short. There is time to save hard. There is time to celebrate and be special.

Anonymous said...


la papillion said...

Hi bro8888,

I've not done a budget before actually. Not even a weekly or monthly one. I find it hard to manage my expenses based on budgets, because certain things come and go. Even my income is varied on a monthly basis, so the uncertainty of it all makes it a very hard exercise to do.

I do agree that there is time to celebrate. I personally find it hard to could be more obsession with being secured by having a healthy cushion of cash. I need to loosen up for sure.

PanzerGrenadier said...


I tend to earmark 10% of gains/dividends/interest for celebration/play/luxuries.

But now in this poor economy, I've gotten more reasons to save.

Happiness is a $1.50 sundae. :-)

PanzerGrenadier said...


Your chart has inspired me to also do one in my excel... But won't be posting it up anytime soon.

Just curious, everytime I load your graph my firefox dies on me...hahaha...

Not sure if others have the same issue?

Be well and prosper.

cif5000 said...

I can't help but to tickle you with this question.

How many years does one depreciate his/her wedding?

Createwealth8888 said...

Hi Brolp,

Don't think Expenses Budgeting is not dependent on Income.

Before you get into your future tuition centre business, kindly learn how to do expenses budgeting.

Every enterprise has to do yearly and monthly Operating Expenses and Revenue budgeting before it begins its Financial Year.

la papillion said...


Haha, you also want to get the graph? Pls do it, I find it very motivational to hve the graph at the end of the month. It's like getting your test results.

For me now, happiness is a day of rest at home. I think I'm overworking myself in the quest to save more..

la papillion said...

Hi cif5000,

My, what a question :) You're talking about depreciating marriage cost? Or the value of the marriage?

Marriage cost to me is an expense, so no need to capitalise it, hence no need to depreciate it too. Just one shot write it off :)

If marriage is treated as an intangible asset, then i guess we need to amortise it. How long? Erm, how about until age 100 and do a straight line depreciation? Hoho

la papillion said...


Thks for your advice. I think I'll probably send you an email about the venture I'm going in to seek your advice. I'll do it once I get more details :)

cif5000 said...

No, not marriage. Wedding.

"For those that depreciate in value (like car or a washing machine), it's not wise to borrow money to pay for it. Some people I know borrow money for renovation, wedding, television sets etc...those are really bad debts."

Anyway, just a joke.

la papillion said...

Hi cif5000,

Haha, got it :)