Money for Monkeys (continued)

Introduction

I think it may be useful to state and explain what each definition encompasses so we can move on with the right footing. You may want to refer to the entities below either as yours alone or as a combined one with your spouse.

1. Annual / Monthly Income
• This is the amount of money you earn in a year or a month.

2. Annual / Monthly Expenses
• This is the amount of money you spend in a year or a month.

3. Annual / Monthly Savings
• This is the amount of money you save in a year or a month.

Yes. These are the only concepts you need to know for 'Money for Monkeys'. If you require it to be simpler, I shall have to crack my brain for it.

Goal of managing money

We will begin with the end in mind. One needs to understand the concept of living within one's means.

Looking back at the definitions given, the goal of this whole thing is : to ensure that one's 'expenses' is not more than one's 'income', with a good surplus for a sound savings scheme for unforeseen eventualities, future plans and growth of wealth.

Only then, would you gain financial independance.

Income

For the common man like myself, this refers to the paycheck we get from our employers. It does not vary much, so we can easily use this amount of money to base our expenses and savings calculations on. Do not include bonuses in your monthly income component, since bonuses are less predictable and so that we could use the annual bonuses to pay for annual expenses such as road tax, insurance and children's school books instead. Do not include overtime pay or allowances too, unless it is something which you would get every month - and use a conservative figure as well.

There are less-common men too - whose monthly salaries are not fixed. They either have their own businesses or that their salaries are pegged to their performance and economy - like car salesmen and real estate agents. Usually, the salaries will be cyclical in nature - meaning that it may be higher in some months than others. If you have been working for many years in this line, use the average or median salaries (whichever is lower) as your income to use, to base your expenses calculations on. If you are very new, then try to use your basic salary as a start or let yourself stabilise first before planning to splurge on high-level expenses.

Of course, there will be others who have multi-sources of income. This includes the likes of teachers that gives outside tuition, the professional footballers that sells satay and the pasar-malam warrior that does import-exports on Ebay whilst collecting rent on several condo units he bought before the IRs were planned; amongst others. All the same, use the average amount that you bring home each month, or even lesser if you wish to be more conservative in your calculations. Don't cheat !

Expenses

This is the tricky part. Unlike income, which usually has a specific figure every month - expenses can grow beyond your wildest imagination. There are the monthly ones and the annual ones too. So, it is very important to understand what is a need and what is a want. Put your expenses in a priority order and in categories. The fixed amount first - things such as bills. Then comes the other luxuries in life that you perhaps can do without. Each of us will put priority to different things, so I will just put up a general example here.

Fixed Monthly Expenses (Bills)

1. Housing instalment
2. Parents’ monthly allowance
3. Electricity
4. Water
5. Kids' school fees
6. Kids' tuition fees
7. Kids' monthly allowance
8. Home phone
9. Handphone
10. Car instalments
11. Internet
12. Cable TV

The part on housing instalments, you need to put up only the cash top-up portion only, if any – the CPF parts will usually settle by itself, unless your monthly CPF contributions is lesser than your monthly housing instalments. There will be a lot more bills of course, if you bought other things such as plasma tv, solitaire diamonds and lorenzo furniture through monthly instalments or your itchy hand tend to swipe the credit card a lot. The thing is, we should compile this up and monitor it every month. If some things have to 'go' then we can easily see which one is of the least priority too, whether it is the car or the cable tv or even kids' tuition, it is up to us. Do use a simple excel sheet to help with the basic functions of adding up the figures, if possible.

Variable Monthly Expenses

1. Food
2. Transportation
3. Health care
4. Personal care
5. Donations
6. Entertainment

Food is to include both home-cooked and outside meals, picnics, snacks and even the chewing gum bought in JB. Health care includes vitamin supplements, dentistry or life support programmes such as dialysis, whilst personal care includes one’s cosmetics, sunglasses, clothings, toothbrush and other accessories. Donations may be placed in either fixed or variable expenses. Other than the usual donations, it also includes wedding gifts, birthdays and other celebrations. The Muslims may want to include the ‘zakat harta’ in either the monthly expenses or the annual expenses to be discussed later. Entertainment shall include hobbies, watching movies, going to the spa or visiting Ah Meng at the zoo. Again, add in more rows if required – but keeping the categories as general as possible will be less confusing. This thing can only work if the expenses are religiously tracked, so that it may be clearly understood where the money is going to.

Fixed Annual Expenses

1. Income tax
2. Kids’ school books
3. Road tax
4. Insurances
5. Club memberships
6. Renewal of licenses

Variable Annual Expenses

1. Travel holidays
2. Home furnishings/appliances
3. Personal purchases

This is the confusing part. Some people live their life just ensuring that their monthly income will be able to cover up their monthly expenditure, yet it is these annual expenses that lurks up from behind and render them helpless at times. A sound savings plan is thus, imperative to a successful finance management. I would personally recommend that the ‘Annual Expenses’ have its own part in the ‘Savings’ category, as highlighted in the next point.

Savings

Every little kid knows the phrase ‘saving for a rainy day’. Somehow, when we grow up we tend to forget the merits of having a good savings plan. While we work hard to gain more income and be conscientious of our expenses, we will need to be really disciplined to maintain the savings plan. It is similar to a diet programme, one may forget about it for a while and when one finally remembers, one has to start all over again from scratch. In any case, once you have decided on a particular amount you would need for monthly expenses, the rest will be kept for savings. You should have specific goals and a vision on your savings plan.

From my inextensive, in fact near-zilch experience, I would recommend 3-categories of savings with another 3 sub-parts in the last category.

1. Fixed Annual Savings
2. Variable Annual Savings
3. Life savings
` a. Emergency funds
` b. Future funds
` c. Disposable funds

After calculating how much you need for the fixed annual expenses, divide it up and get it ready before it is due. Then, put aside a specific amount which one is comfortable with, for the life savings. The emergency funds are of utmost importance, its significance being to protect oneself from a bad spell that insurance may not cover. Accidents, critical illnesses and unemployment are amongst the biggest worries. One may quickly realise that even though insurances cover perhaps a large chunk of an emergency, the small portion to be borne is still quite a hefty price to be paid in dire needs. In some instances, you may even have to pay for the bills first before you could make a claim – which is an ordeal that could take many months.

How much should the emergency funds be ?

Frankly speaking, I would recommend nothing less than a year’s income. Thus, if you earn $2000 a month, you should have $24,000 set aside in the bank as your emergency funds. It will take a few years to save, yet it is the most crucial part. One should save as much as they can while one is still single and without much responsibilities and ‘expenses’ to their name. The bulk of one’s bonuses in their younger years should be used to ready the emergency funds as quickly as possible. Of course, as one’s income increases, so does one’s cap for the emergency funds.

The variable annual savings should be a separate entity from the life savings. Should one plan to buy a new Bose Lifestyle 48 entertainment system, or wants to go to Machu Picchu in Peru for a holiday, it should be saved for, separate from the fixed amount one has set aside for the life savings. There may be some allowances to be made for weddings and first-time home downpayment though, according to individual preferences.

The setting up of the emergency funds itself may take a few years. The fun part starts when you are planning for the future. Everyone’s future plans are different. The more pertinent ones would be saving up for your children’s education. Tertiary education are getting more expensive nowadays. It is growing a lot faster than the inflation rate, and as parents – it may be the regret of a lifetime should one not be able to send one’s kid to university – especially if the kids are eligible and want to pursue their dreams through it. Other future plans may be to retire early, an upgrade to a bigger house, to set up one’s own business, or to buy a car. One thing leads to another – do not plan to just save enough for the downpayment of the bigger house or car. Each purchase should be calculated for and assessed to be viably sustainable in the long term.

For most of us, these future plans funds will take another few years to save for. Once this is up and running, then there would not be much worries that one has but to grow the money for retirement. The part on disposable income, is basically the last part of saving for the sake of savings. It should not be taken as unimportant as sometimes, they may be things which one may not have foreseen, and it could arrive a little shockingly, such as an invitation to join a business venture with a couple of old friends.

Investing

There are many ways of growing your savings. It will not really be covered here today, as that will be a whole separate topic by itself. However, there are a few things that one should know. Firstly, there are about 4 basic factors that you should ask yourself before investing.

Duration - How long do you want to invest for?

Returns - Do you want income or growth?

Liquidity - Do you need to get to your money easily?

Risk - Understanding the nature of risk involved

As a rule of thumb I’ve set according to the plan stated above is that, to put in your emergency funds in a low risk basket such as fixed deposits in reputable banks, the future funds may take moderate risk ones such as unit trusts or some blue chip shares whilst the disposable income portion can go for the high risk junk bonds, securities or even commodities.

Summary

1. The goal is to ensure that one's 'expenses' is not more than one's 'income', with a good surplus for a sound savings scheme for unforeseen eventualities, future plans and growth of wealth.

2. Income is the fixed amount money earned a month. Bonuses and overtime are to be deposited to ‘Fixed Annual Savings’ to pay for ‘Fixed Annual Expenses’ and its surplus to be deposited to ‘Variable Annual Savings’ accordingly.

3. Expenses are divided into 4 parts;
-------• Fixed Monthly Expenses (bills)
-------• Variable Monthly Expenses
-------• Fixed Annual Expenses
-------• Variable Annual Expenses

4. Savings are divided into 3 parts and 3 sub parts;
-------• Fixed Annual Savings
-------• Variable Annual Savings
-------• Life Savings
--------------i. Emergency Funds (equivalent to a year’s wages)
--------------ii. Future Funds
--------------iii. Disposable Funds

5. Investment assessment should include;
-------• Duration
-------• Returns
-------• Liquidity
-------• Risk

6. As a rule of thumb, one may maximise use;
-------• Emergency funds for low risk investments
-------• Future Funds for medium risk invesments
-------• Disposable funds for high risk investments


Last Note

There are a lot of ways of doing things and I am sure that there are better ways of managing your money out there. The methods I propose here are just the basics – understanding how much we earn, living within our means, planning for the future and saving for a rainy day. As long as the basics are right and the intentions are true, then one would be able to live rather comfortably with a sound financial management plan. Do inform me if you disagree with any of my proposed ideas or concepts, I would be pleased to hear it. Do share with me some of your methods so I can learn them too. We learn better through sharing of ideas.