Posted on February 21, 2009 - by La Papillion

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. Read more…

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1. Personal Finance Part 15 – The Evils of Gambling
2. Matrix for Personal Finance Planning
3. Personal Finance Mistakes To Avoid