“There is no dignity quite so impressive, and no independence quite so important, as living within your means” — Calvin Coolidge
In my last writing, “Pocket Too Deep, Hand too Short”; I talked about how at the end of each year, (some people make them at the beginning of the new year itself…which I think….neeoooo…not the best time to do it) people get down to writing their new year’s resolutions.
Can this be termed a “wish list” or “shopping list”? There have been many times when I completed my new year’s resolutions, it looked more like a “things to do list”. Nothing wrong with that. It’s just that the list was too long and seemed impossible to accomplish all that was on it. Well, at least I knew what I wanted to do.
Over the last few years, I have reined in my over-ambitiousness and capped the number of to-dos at three for the current year and two medium-to-long term goals, I have to do the three for the year and at the same time, work on the other two with a view as to when I want them completed.
Goals give me a sense of purpose instead of letting time be like kali tragus. Besides the resolutions of wanting to be punctual (Malaysia time is in no way the new normal or the Greenwich meantime replacement), and getting into a regular exercise routine; I talked about wanting to be financially free. There are several views as to what being financially free is all about. Here, I will attempt to sell you / (you buying?) the idea of being financially free is having peace of mind.
The first thing you have to do is to put the brakes on the spending, I literally mean jam or stomp on the brakes, bringing your spending to a screeching halt; whether or not you have money in hand or an accordion of credit cards, debit cards or cryptocurrencies. We may all have good intentions; i.e. to keep the economy going, etc etc (Hmmm….this sounds like “that” movie… In that movie, the king usually ended his dictated sentences in his oral dictation with “etc etc”). Back to the $…Your money counts, so you have to take charge of it. Temporarily, freeze all spending until you can sort out the inflow and outflow of money. If there is a need to shop; then only allow the bare necessities. The keyword is “need”.
Next, you will need to draw up an Income/Expense chart to track your Income vs Expenditure. Record keeping – oh, what a drag. You will have to be truthful to yourself in recording your Income and Expenditure in detail and do it diligently. Accurate recording gets accurate results. Not many of us realize how we spend our money. You may freak out when you see what you have recorded down. Many a time, people are not aware of their spending habits – it could be the number of times in a week that you go to the pub or the frequenting to expensive restaurants, etc; it could be anything. If you are alarmed, then recording your expenses vs your income is working. All the same for those who aren’t alarmed, maybe you have not reached critical or near critical cashflow levels; it is still a good step in the right direction to want to straighten things out.
One of the safest ways to hedge against inflation of the future and unforeseen expenses is to have at least 10% – 15% balance net income after having 1) put the first 10% (most financial “advisors” would tell you to keep 30% for investment) income in a locked, no risk account which are generally fixed deposits. Fixed deposits have low returns. Low risk gives low returns; high risk could generate high returns. ; 2) paying off the monthly expenses. In the example, Fig 1, it shows there is a net balance in your favour for that month. The next month, you will start with a gross “income” of $6,900. Go through the expenses of that month. Then, if the balance exceeds the RM900 from the first month; this excess amount balance you can invest in the various financial instruments if you like.
Let’s say, you end up with a $900 net balance in your favor for the month of January. You start the month of February with $6900 in hand, go through settling the usual monthly expenses and maybe some unforeseen expenses. Now, you will see that you have a monthly 10% savings, you are able to settle your current monthly expenses; and you will be able to invest with a surplus balance (if any). Repeat this each month.
|Less : 10% Locked Savings||-$600|
|Less: Living Expenses, house|
|instal, car, taxes, etc||-$4,500|
|Balance January 2021 month carried forward to February 2021||$900|
|Income Balance brought forward from January 2021||$900|
|Less: Living Expenses, house and car loan repayments, taxes, etc.||-$4,500|
|Less: Unplanned for expenses||-$345|
|Balance February 2021 month end carried forward to March 2021||$1,455|
|Less Income Balance to carry forward to March 2021||-$900|
|Balance Income that can be used for investment||$555.00|
|This $900 is used to hedge against unforeseen expenses, etc.|
|It should not be seen as “excess money” to splurge with in the following month.|
I have to repeat that in this article, we are looking at “peace of mind” being financial freedom; not the idea of meeting all the monthly expenses only. Why I say this is because the more you earn which could translate or relate to more you spend; may not make you wealthier than a person who earns half of what you earn, but manages to save and invest with money set aside from his income. Meeting monthly expenses is cash flow freedom. The part that creeps in quietly are the loans. Fine, let’s say you have factored in 1. Housing loans 2. Car loans vehicles 3. Children’s education. These three expenses are more or less fixed, monthly; with possible slight variants up or down depending on interest movements.
Then, there are the “apple in the Garden of Eden” loans which among many, include credit cards, home renovations, term loans, “take now, pay later” items; the list goes on. These are temptations. Many of these loans come with tag lines like, “because you earned it, you deserve it”; “You need that all expense covered holiday that you deserve”; “you can afford it”; and one of the most famous cliche lines sales people use to entice you, ” it’s not like you are paying”! Of course you are… When the bill comes. With interest to boot, if you have bought the item on an instalment basis. With the instalment comes that “I” word, dreaded most if you have to pay it – interest. When you receive your credit card statement; it will entice you to pay the minimum of 5%. You will think it’s a great deal. This means you’ve got more money to spend. The item that you first took on installment payments with interest; now has an interest on the balance of your monthly payment that you may have decided not to pay in full for that month. If somehow, you have defaulted payment, even by a few days; then you will end up paying a late payment interest and a finance charge on top of everything else.
Are these temptations to blame for the unfortunate financial predicaments we get ourselves into? Not really. We are spoilt for choice with all the offerings out there. Which is simply awesome! Some say “let market forces dictate” in investments. I say let market forces dictate in the way we live. What we need to do is be responsible with our income, expenditure, investment and cashflow in general. If you are not experienced or capable; you can seek advice and help. There are many avenues, though I would caution you about seeking the help from “financial advisors” in general.
Many of these “financial advisors” seek to promote investing in their financial instruments without carrying out a full financial assessment of you. You may find yourself in a worse financial position than before you started off receiving advice from a financial advisor. You should seek the services of an independent financial advisor. This “Independent Financial Advisor” will assess your financial position thoroughly, without you having the fear that he wants to sell you something. Of course, he will charge you a fee for his services which could be well worth it. In the final analysis of his assessment; he may point out access funds that you may have which could be put in an investment or a portfolio of investments. He may recommend several financial instruments that could provide a balanced mixed portfolio of investments.
Some people have confided in me that they believe there is no hope due to the financial situation they are in. There is always hope. One avenue is through “Compass Catholic”. Talk to people who are financially savvy and can help. Most important is to become financially responsible which will include inculcating good financial habits.
“For I have learned…to be content…in any and all circumstances. I have learned the secret of facing plenty and hunger, abundance and want. I can do all things in Him who strengthens me.” (Philippians 4.11-13)