It’s 2017, and we’re all making resolutions to lead a better life in the new year. Usually, we set goals in different areas like health, finance, career and relationships. Having spent a number of years investing at a few hedge funds, we’ve learned a few important things about how to improve a company or a person’s finances healthy. From an expert’s point of view, personal finance is actually quite similar to corporate finance. With careful planning, we can create a healthy balance sheet that can allow us to invest for the future while preparing for emergencies. Below, we have prepared 5 tips that can help significantly increase your financial health in 2017.
1. Define Your Fixed and Discretionary Expenditures
The first step of being financially healthy is knowing what you need and what you want, and comparing it to how much we can afford. The important principle to uphold here is that your expenditures should not exceed your income. Otherwise, you would have to borrow money to finance your consumption, which could be a dangerous exercise. Borrowing money to spend today means less money for you to use in the future. Unless you are extremely certain that your income will grow dramatically in the near term, you should be spending less than what you make.
One easy way of ensuring you do so is to define what you need and what you don’t necessarily need to spend on a regular basis each month. The first category, which we shall refer to as fixed expenditures, includes things like rent, home mortgage payments, mobile bills, utility bills, petrol expenses and grocery costs. These are spending areas that you can’t avoid or easily reduce. The latter category, which we shall refer to as discretionary expenditures, includes things like restaurant bills, drinks at the bar, movie tickets and travel expenditures. While you don’t necessarily need them to fully function as an adult, you still want to have these things in your life.
By defining exactly how much your fixed monthly expenditure is, you can set a baseline expectation for how much you could possibly save on a regular basis. Then, by calculating the difference between your monthly income and fixed expenditure, you can calculate how much is available for you to spend on the discretionary categories. Ideally, the sum of your expenditures should be lower than your income to allow room for savings.
2. Set A Weekly Saving Target, and Plan Your Spendings Accordingly
That leads to a second topic of saving. While this could be somewhat stressful, it’s important for you to set a goal for how much you want to save over the course of the year. For example, let’s assume that you would like to save S$50,000 by the end of the year. While that’s a lofty and certainly an applaudable goal, it’s quite tricky to actually achieve it because humans have a tendency to prefer instant gratification over long-term happiness. Would you really forgo that restaurant dinner today when you have another 350 days to save? This pattern repeats until you realize it’s too late and ultimately postpone the goal for the year after.
Instead of allowing yourself to fall into this trip of instant gratification, you can regiment your behavior by setting up a more short-term goal. Ideally, you could set a weekly saving target (i.e. you would have to save about S$960 per week to save S$50,000 in a year). By setting a weekly goal instead of an annual or monthly, you can assess the financial consequences of your daily spending more closely and get closer to reaching your goal over the long run.
3. Track Your Finances
While the last two tips are great ideas, merely planning to carry them out may not be enough. First of all, it’s rather difficult to keep track of things mentally over the course of a year (let alone a week!). Secondly, without a track record, it’s hard to force yourself to continue managing your budget because we either get lazy or get too tempted to buy something we shouldn’t.
A nice trick is to build an excel spread sheet or keep a notebook that tracks all of your daily spending. You should write all of your known fixed expenditures in it in advance, and keep receipts of everything you buy on a daily basis. As you do this every day, you are building a project into which you’ve invested a lot of time and effort. Such process allows you to not only plan and monitor your budgets, but it also helps you commit to the project emotionally. You are much more likely to complete something you’ve spent a lot of time on than something you merely thought about for a few days.
4. Use Your Debt Smartly, Pay Down Your Debt
One thing we should mention as a part of your fixed expenditure is debt repayment. As wrote previously, household debt in Singapore have been rising using debt quite actively as consumers have been borrowing to fund their expenditures. Debt vehicles like personal loans and credit cards have been especially popular in the recent years. While these financial instruments can be great tools to make necessary purchases, they needed to be used smartly and with care.
When planning out your monthly and annual budget, you should include both monthly repayments (which includes interest and principal) as well as full principal repayment on your loans into your fixed expenditures. These are spendings that simply should not be ignored, as interests on unpaid balances can balloon to an unbearable amount before you realize. You should also remember that credit card debt should be repaid in full at the end of your monthly billing cycles. Credit card debt is different from other loans in that it does not charge you interest unless you carry a balance over from the previous month. By paying off the balance full, you can enjoy the convenience and rewards that credit cards provide without incurring interest expenses that quickly eat into your monthly budget.
5. Invest For the Future and/or Start An Emergency Fund
The whole point of doing the above exercise is to save enough money for a better future. Like a business, we should try to improve our life while being ready for tough times. With enough savings, you can do a lot of things that you otherwise can’t afford on your monthly salary. For instance, you could use your savings to attend an MBA program and increase your income. Or, you could learn a new skill like programming to switch your career. You can even invest in stocks, bonds or ETF funds to gain additional yield on your cash. You can also be ready if and when there’s an emergency like an accident.
Article by Value Penguin