Posted on May 28, 2009 - by Market Uncle

Matrix for Personal Finance Planning

Rationale

As I was working on a long term planning project, I came up with a matrix to put various initiatives in perspective. It suddenly dawn on me that I could apply that matrix I developed to personal finance planning. I promised my friend to blog on it, so better keep my promise :).

Personal Finance Planning Matrix

The above shows the personal finance planning matrix I’ve created for a typical, non-financially independent individual like myself, still slogging to make ends meet. Basically, annual income can be spent or set aside for future use. Spending is typical a reaction to a need or want and hence ‘reactive‘ versus saving where money is set aside for future use, i.e. pre-empting future rainy need.

Risk provides another dimension to consider when spending or saving. Merely spending on needs make life boring and meaningless while merely savings lose out to inflation. Thus inducing the individual to pamper oneself with some discretionary spending on wants. For the more adventurous, dabbing in some investments for higher returns.

Self-profiling

Before one consider how much to spend, to save or to invest and much is enough, how much is too much, one could consider using the matrix above to put things in better perspective. The following shows a annual budget profile for an individual, drawing some 14 months salary during a typical, non-recession year:

By looking at his or her profile, one can easily come to conclusion whether he or she is comfortable with the distribution, in terms of months of annual salary actually used in each section.

One potential contention or confusion is differentiating between ‘need’ and ‘want’. Since each individual have different value system (i.e. what is important to one may not be important to another person), differentiating between needs and wants need not be a painful exercise, just allocate things one can do without into wants.

How much is enough?

To answer the question of under or over allocation in each section, one can take a stock of his or her current status: Read more…

Related posts:

1. Personal Finance Mistakes To Avoid
2. Personal Finance Part 12 – Indebtedness
3. Personal Finance Part 13 – Differentiating Between Needs and Wants