Cash Management

In The Star newspaper today (Sept 23, 2011), Netizens called for the need of Financial Education for younger generation and another voiced out that there is an urgent need for communication among family members on Financial Planning. Separately, in the Views section, a man wrote about how hard it is to make ends meet with high cost of living. I do agree with him when he wrote, “live within your own means is easier said than done in this materialistic world that we live in“, but it is not impossible.

Cost of living is always on a rising trend. Food and services cost much more now than five years ago. We also know that it will surely cost a lot more five years from now. Take a linked-house for instance; some 20 years back, you only paid RM100K (+/-) for a decent one in a nice neighborhood; 10 years after that, you had to pay close to RM300K, today it costs almost RM500K for an intermediate double-story linked house in a nice neighbourhood!

Young people who enter the work force today will soon come to realization that the income they earn may not be sufficient to finance the lifestyle they once enjoyed while they were still studying. This realization will dawn on them, like a bitter pill to swallow, more so to those who were used to being well provided for and pampered by their parents.

Once they earn their own income, they would have to start paying for their own car installments, maintaining that car, room or house rentals (if they live away from parental home), paying for their study loan (if any), paying for meals, social outings with friends, etc. Notice that I have not mentioned any periodical/optional spending yet, like purchases (clothes, shoes, accessories, etc), medical expenses, friends’ birthdays/weddings/newborn gifts, purchases of books, magazines, IT gadgets, movies/DVDs, sports equipment, gym membership, and more. How much is required to provide for such current lifestyle?

Without proper cash management planning, you tend to spend as you please and worry about the consequences when the time comes. When you realize that you can’t even afford some little luxuries or pleasures in your life (after working so hard), you may resort to the easily obtained credit cards from eager banks. As a result, you will spend more than you have, buying stuffs on credit, which you can’t really afford. On credit means, it is a loan. Whether it is zero-interest 6/12/18/24 months installment or lower interest (than normal finance charges), it is still a loan with an interest.

It is truly zero interest if you can make good the monthly installment, i.e. pay in full every month and on time. If you don’t pay the full installment amount, the balance will be added to your outstanding figure and interest will be charged accordingly. As a result, you have to take longer period to settle that initial principal sum. At the end of it, you are actually paying much more!

What should you do? As easily said, live within your means. I do feel for you…it is tough when income stays stagnant but cost of living keeps increasing. These days, you cannot step out of your house without paying for something. Basics like petrol, toll charges, parking fees have to be paid before you can feed your hungry stomach!

Well, we cannot control people to give us a raise every time something increase in cost. The only way is to control our own spending. We have to find ways to save in little ways, and big ways as well. Decide to play a pro-active role in your personal cash management and be at the driver’s seat. Only you know very well what you really need and not.

How do you see it? Work out your monthly budget (personal and/or family) according to your net income (the amount you take home with). If you are not sure, record every purchase for the next 2-3 months to identify your spending pattern. Track your expenses using a simple method, merely INFLOW VS OUTFLOW. All smartphones and tablets have all sorts of cash-flow apps available. You’ll be spoilt for choice. Choose one which suits your style of recording. The easier it is to record, the more you’ll keep to doing it, for the longest time. Make it habit.

Once you have the budget vs actual spending recorded, see if you have overspent in any area. If your spending is within the budget, excellent! Next, look at your cashflow statement (Income vs Expenses). Is there surplus (positive balance : income more than expenses) or deficit (negative balance : spend more than income)?

If there is surplus, work on putting aside between 10-20% of your net income as savings and the balance to be spent. Remember, save for yourself first. However, if you find that you have more financial obligations than your income (deficit), you have to look through your expenses list again. You have no other choice but to bite the bullet to bring the figures down. If you can live without certain things, take it off or find a more cost-effective alternative. Try to save as much as you possibly can. Failing which, you are in great danger of being sucked into the debt quicksand.

Most importantly, do not spend in advance. Let me explain, if you want that designer shoes now for an upcoming gala dinner, don’t find reasons to sign credit card for it. You might say that “I’ll sign now and when I get my bonus in a couple of months’ time, I can full-settle that purchase.” That, I’d like to call “advance spending“. What if there is no bonus coming your way? You’ll be stuck with the debt. If you want something expensive, save up for it or wait till you receive that bonus. It’s not a basic need. It’s just a “want” – which you can live without but lovely to have.

The earlier you plan your personal finances, the more secured will be your financial future. The best time to start is when you get your first pocket-money. Yup, you can start as young as being first day at school. If you start at such young age, by the time you enter college or university, you will know how to budget your expenses like a pro! When you enter the work force, budgeting and cash management will become part of your life. Cool, isn’t it?

If you haven’t done it yet, it is never too late to start right now, right here. The sooner you act on it, the lesser financial mistakes you make. I started late. I wished that someone started talking to me about proper cash management and financial planning when I was much younger, especially when I first started working. By the time I knew about it, I had a lot of damage control to do and I had to start from scratch. Though I felt that it’s late, it was still not too late for me to make it right.

So, start with your budget then record all your expenses. Make comparison between budgeted and actual expenses. Finally, if you have any surplus, save for 6-12 months of expenses, to be put aside as emergency fund. Next, save for your Retirement. The sooner you start building the nest egg, the more fund you’ll raise. Some may want to save for their first home, wedding, birth of their child, etc. Plan well and plan right. If you can’t do it, seek professional help. There are many licensed independent financial planners in town. They can help you plan and advice for a reasonable fee.

Need not say more. Act now. All the best to you, and please make the most of what you have.

~ Alice N.

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