Monday, October 04, 2010

How to kick start your savings plan?

Quite a number of people asked me how I managed to save in such disciplined manner. The equation of saving never changes: Savings = Income - Expenses. You can either increase your income, decrease your expenses or do both at the same time. I prefer the first method of increasing your income, because seriously how much can you cut from your expenses? There will be a limit to the numbers of needs that you can convince yourself to change to a want, and the flow of life will just increase your expenses especially once you have a family. As mentioned in a previous post, I estimated that you need roughly $2,650 expenses to have a comfortable life. Let's say you don't intend to have such a comfortable life and cut it down to $1,500. If you're earning 2k per month, I'll still say it's hard to save a lot by cutting expenses. The better way is still to see how you can increase your income instead.

But the purpose of the post here is not to give ways on how you can increase your income. Everyone's talents and strengths (and chances) are different, so you got to be self-aware of what you can do. If you're good in sports, maybe can you teach swimming on weekends to earn some extra bit. If you have excellent skills in bakery, perhaps you can sell some to neighbors and take orders during festivals. The point is that there's always something you can do if you put your mind to it. The best way is to monetize things that you do habitually into an income stream. You think about it.

I believe that if you do not know where you stand now, it's hard to set a suitable goal forward. I feel very uneasy when I asked these few questions to myself:

1. How much do I spend on food per month?

2. Out of the food expenses, how much did I spend it on restaurants?

3. How much do I spend on transportation?

4. Out of the transportation expenses, how much did I use it on cabs?

And questions like that. It makes me uneasy because from the money that I earned, I have no idea where it went to. I lead a very blurry life between 2003 to 2007 because I have no idea where my income goes to. At the end of the month, it seems like the money I get 'disappears' and I looked forward to the next paycheck. When I do have a sum of money, I will feel rich and buy myself something expensive to reward myself for the work well done. This goes on for years and despite working hard, I've nothing to show for in my bank account.

I felt increasingly uneasy until I finally took action to remedy it. The very first thing I did is to sort out how much money and assets that I have right now. In other words, I need to find out my net worth - how much assets I have and how much debts I owe. Since I do not have any debts at that time, it's just a matter of adding up the amount that I have in all my bank accounts, money in the money market fund, net value of my stock investments, cash surrender values of my whole life plans and CPF. I put it in an excel spreadsheet to see the changes from month to month so that I know to a great amount of accuracy (it's not 100% for sure, there will be some 'losses' but that's okay) where my money is sitting at the end of every month.

After doing up my net worth, I proceeded on to the monumental task of constructing my cash flow statement. In my line of work, my booked earnings is divorced from the cash that I actually get per month. This means that on one spreadsheet, I've to record down how much work I did on that month and on another spreadsheet, I've to record the actual amount of cash that I received. I also started recording my expenses to have an idea of how much I spend. I'm detailed in my recordings, because I would put in the amount that I spend and the categorized item (e.g. food, transport, parents, insurance etc) with a short comment. So if I spent $50 at Tony Roma's restaurant alone, I would put it under 'Food' catergory, with the comment "Tony Roma - alone". This is to track my expenses so that I know how much I spend on what at the end of each month.

Now isn't that very similar to companies too, where they have their earned revenues and cash flow statements? I thought it's the very same thing and started thinking of myself as a company and I'm the CEO of myself. I started doing this networth, cashflow, income statements after reading intensively about financial accounting to jumpstart my interest on investing as opposed to trading. 

Once all my 3 personal statements are up, I really sat down and started analyzing what went wrong with this 'company'. Why is it that I can make an income every month but at the end of 4 years, I've nothing much to show in my bank accounts? Now here is where the expenses can come in very handily. I think by looking at the cold hard facts of your expenses per month, you can see where all the leakages are in all its glory details. Perhaps you've been spending too much on drinks, perhaps you've been buying too many clothes, perhaps you've been ebaying too much. This fact finding exercise will remove all traces of faulty mental accounting that we will do all the time. Oh, I got a bonus this month so it's okay if I spend it on this plasma tv. Oh, I got some trading profits, it's enough to offset some losses I had and the change can be used to buy a new gadget. Some mentioned that this detailed tracking is too much for them...well, I would say it depends on how much and how desperate you want to know. I did a very detailed account of close to 6 months before doing a less detailed one from now onwards because I already know my spending pattern. The interesting thing is that initially I wanted to do it for only 3 months to have an idea but eventually it became such a habit that I extended the 'trial' for almost 2 years now.

I think after the fact finding exercises to determine where you stand currently, a plan to remedy it should already be materializing in your mind now. If you have the discipline to write down your all your expenses for 3 months and above, carrying out the plan to change your spending pattern should be a walk in the park. I think most people would give up on the expenditure recording part.

I came to the realization that I am not spending a lot of money on myself, and most of my expenditures are actually on three things - food, transportation and parents. Hence to limit my expenditures would be foolhardy, because there is a limit to how much I can cut. The only way forward to improve the financial health of me as the company, is to increase my topline - my earnings. I also realised that I can afford the little things here and there to reward myself (as I've always suspected, I'm a very horrible slavedriver to myself). I can well afford it and I should do it so that I can stay longer in this game. Having a very concrete understanding of my financial circumstances, I also made a few plans to have a merger & acquisition exercise towards the end of this month, an acquisition on property towards middle of next year and perhaps spinoff a new company (or two) in about 2 years time. All these need huge capital expenses and being a private company, I can't sell shares to the public at all. So what do I have to do?

The plan is easy enough though the execution is not at all. Just bloody save 50k per year for 2-3 yrs. There you have it - the method (work and save), the motivation (preparation of life's milestones) and the killer (me).

To summarise this very lengthy post:

1. Have an idea on where you stand financially at this moment

- Do up your net worth and cash flow, including the expenditure statements

2. Analyze your statements

- See where the leaks are and how to remedy them

3. Set progressive goals 

- Set action plans on how to reach these goals


Musicwhiz said...

I actually kept track of all my expenses (including my wife's) for one whole month, and then promptly gave up! It's very tedious and I felt I didn't need the detail.

Perhaps for salaried employees, it's easier in the sense that you can socket away $XXX into a "don't-touch-this-savings-account" account and in that way, you will know you have paid yourself first. Since as a salaried employee your income is fixed, this should work pretty well as long as no ad-hoc large expenses crop up. Well, so far it has worked for me...

I do a Cash Flow Statement and simple Balance Sheet (net worth) every month too. Thus far there has always been positive cash inflows, except for months where I had to budget for a big insurance premium (I pay annually). My net worth has been going up consistently since 2005 except for some dips in months where Mr. Market is more manic.

I think this is a very good way to track progress! Keep it up LP!


la papillion said...

Hi mw,

I think you're right, if you're salaried worker, it can be easier to keep track. Part of the problem for me is that my income comes in every now and then, so it's very easy to get lost in all the payments. At least that's what happened to me when I first started.

My net worth is also increasing month to month except on rare occasions (like this coming one) that will dent it. But I never really care much about net worth...I'm always more concerned with cash flow. As long as my monthly income is more than expenditures, I'm good :)

Thanks for your encouragement, mw :)

Kyith said...

i think you seriously need quicken. makes thinks so easy.

there is also microsoft money sunset. not supported anymore but very comprehensive and was competing with quicken.

i used quicken and on quicken have 7 years of daily data.


Createwealth8888 said...

In reality, most people save but fewer are Great Savers.

Most savers are also investors but not many savers become Great Investors.

We need to recognize the fact that saving is Great but investing well is Greater.

Anonymous said...

I have been using Microsoft Money since 2003 to track all my expenses.

It is convenient as i can generate a report anytime at any time frame to show me my expenses.

I will set up into many accounts, eg, cash, bank 1, bank 2...

For those monthly fixed expense, i will key it in advance into the software. and double check every mth.

Actually, it is very fast to record the expenses daily as I do not buy a lot of things daily. so i make it a point to record daily.
If there are many expenses in a day, i will record in my hp 1st so that i can remember.


la papillion said...

Hi Drizzt,

Thanks for sharing that. I tried using one of these softwares before, but couldn't quite get used to it. I had customised my excel spreadsheet until it is not too hot and not too cold but just right for me, so having some reluctance to change that.

However, will give it a go at this one to see if I like it. Thanks :)

la papillion said...

Hi bro8888,

I think saving comes first in the order of things. Without the first tranch of savings, there is no bullets to fire at all. Both saving and investing are equally important to me, as they are part of the bigger plan (other part being insurance).

I don't see why investing should be placed a greater emphasis than the other parts. Perhaps we're at different stages in our life hence we see differently?

la papillion said...

Hi Elaine,

I also record things in my handphone first before transferring on a weekly basis. It's more convenient rather than keying it everyday.

I agree that it's very fast to record...less than a min each day? But it requires a conscious effort to remember to key it in...I think pple are referring to that mental effort as 'hard'.

Kyith said...

if u do it for 7 years i think its ok.

the really upside is really you can schedule your transactions every month.

what i do is that every month 20th i get pay and i transfer them to virtual accounts.

so :

tranf XXX -> Investments
tranf xxx -> Parents

all i had to do is key in. very cool.

la papillion said...

Hi Drizzt,

My problem is that the income doesn't come in one lump sum. It comes every few days or so, so it's impossible to say at a certain date in a month I'll schedule certain transactions.

Not really upside in my case, haha

Createwealth8888 said...

Not so wise to assume that we will are likely to save more and earn more.

There will be some points in our working life where earning stop increasing further and saving will start decreasing as expenses start increasing especially those in sandwhich class.

AK71 said...

Hi LP,

This post of yours really got me thinking. It got me thinking not because I am not saving enough. It got me thinking as to how have I been saving money all my life. I am just a giamsiap person, I think. :)

cif5000 said...

I used to carry a tiny paper notebook and made manual entries. My personal experience is that the trouble of having to record an expense actually cuts down my spending. One drink is one more line of entry. I became very conscious. Nowadays, I still have the habit of not ordering a drink during meal time, but that's more of a habit than for the purpose of saving. Once you know yourself, the rest is easy.

Kyith said...

i feel that sometimes you need to train your brain abit. try remembering at least short term stuff like what u eat and spend in a day

la papillion said...

Hi bro8888,

Agree..not wise to think that we can always earn more and save more. Likewise for investing/trading, equally unwise to think we can always push for more.

la papillion said...

Hi AK,

I think I'm giamsiap too. Hoping to change that, haha :) I'd a very generous gf and she's rubbing her generosity on me ;)

la papillion said...

Hi cif5000,

Ya, I think you mentioned that to me before :) Actually I seldom ordered drinks too. Last time I didn't order drink so that I can save my lunch budget by 50% (last time being in sec/jc/uni). I'm always in a tight budget because of my very low pocketmoney, hence the need to do such things.

But it had since become a habit. I typically only get a drink in social occasions.

When I started doing the recording of expenses, the act of recording makes me conscious of my spending too. So I agree with you, it can be too much of a hassle to record it down, hence you spend less. But these days no need to do such thing, it's already quite well trained :)

la papillion said...


Can't rely too much on brain power. The mind is always lazy and needs to be whipped into action by routine. It's not that I can't remember, it's just that I would rather not rely on memory, haha

PanzerGrenadier said...


The key to recording expenses is that it makes us conscious of our spending. I use it as a tool to know how much I've saved after deducting my monthly expenses against my income. I also track cash flow, i.e. lump sum payments are deducted as "expense" so that I feel the pain immediately although I can amortise it over a few mths.

In short, keeping records helps eliminate fuzziness on how much we spend/save which I credit "Your Money or Your Life" the book for helping me achieve the discipline :-)

Be well and prosper.

TEA ENG PENG said...

I've tried all sort of money tracking software too and gave up! It's tedious enough to track and even more tedious to key in using Quickbook or Money.

The easiest for employee is to pay yourself first by setting up auto giro or internet transfer every month to different account like what Drizzt said...

If you are a self-employed like me can be a bit tedious and I am going to show you the exact way I'm doing.

I strongly agree that a spreadsheet should do the work and customize according to your need. You can simply use Google Doc to allow access anytime you need if you have 3G in your phone. Else simply get a spreadsheet application for your phone.

Another way I find useful is to ask for receipt for every purchase and snap it away with your camera phone! It automatically form an expense log.

The other way is to charge everything possible into your credit card or better still debit card to form auto book keeping. Make sure you can pay in full every month!

The last thing I do is to download my internet banking statement and compile everything once a month.

Now a day I gather all the above data and pass them to an accounting firm to sort it out for me. It's tax deductible!

In fact, I do not normally track my expense regularly as I believe in we should focus on the attack rather than the defense. If we take a defense strategy, the chance of winning is very low. We will only lose less but not winning enough.

I will only track my expenses for at most 3 months to know my average spending habits and knowing where the big expense will be coming. After knowing your spending pattern, you can then put in all your energy and effort into income building strategies.

Read my blog @ for income building strategies.

Kyith said...

I came up with a guide how to track your spending goals using a free app called todolist.

How to create a budget plan in 10 easy steps

i really like the idea of photo recipts but i think its important to use Quicken. Really. saves you alot of trouble. i just set up the accounts and forget about it and just key in the expenses every day. if you dun want to do that just get an android phone or an iphone get an app that takes photo of your receipts. one week to aggregate them.


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