05-04-2012, 04:54 PM
Hey, Musicwhiz, I thought this is a very well written piece of article, and should share it with everyone here. It's too good to be missed for people who wish to learn about personal finance. I guess it will stay good/relevent for many many years to come becos it's written in local context.
Wow, congrats to our in-house writer!
(Btw, if someone has oready posted it, let me know, I will delete it; I don’t follow the forum too closely.)
http://sg.finance.yahoo.com/news/compreh...56432.html
How to comprehensively track your finances By Musicwhiz | Yahoo! Finance Singapore – Tue, Apr 3, 2012 4:45 PM SGT
When thinking about personal finance, a colleague once asked me if my wife and I keep track of our spending and our mortgage balance, as she was also keen to settle down with her husband soon and wanted to find out the proper way of managing finances. This made me do some soul-searching and think about how I was personally monitoring my financial life and what spreadsheets I had on me which helped me to achieve this.
Thus, this post is about the different aspects of one's finances which one should track in order to ensure most bases are covered and you do not receive a "nasty surprise".
The need for detailed tracking and documentation
You may ask yourself — why is there a need for detailed tracking, documentation and monitoring of one's financial status, and why must it be comprehensive? I am of the opinion knowledge is power. Being aware of your cash reserves, CPF balances, outstanding mortgage loan and investment portfolio would give you peace of mind that you are in control and that you have a grasp of what is going on in your financial life.
To do so requires meticulous tracking and the use of either a spreadsheet or a device for monitoring (for those who download apps on your smartphones). An additional advantage of being aware also means that you are able to react and not panic should there be an urgent situation or an emergency.
Cash and bank balances
This section is essentially the "lifeblood" of personal finance. It constitutes all bank balances in all bank accounts and shows the detailed cash movements made during the month. This is also the section where I do simple budgeting.
At the start of each month, I would input all my fixed expenses into the spreadsheet as a negative number (i.e. all GIRO automated payments like credit card bills, phone bills, utilities, conservancy charges, maid levy and insurance). The ending balance, if negative, will reflect the fact that I did not retain sufficient funds in my savings account to fund the month's expenses. Other budgeted expenses which are discretionary (e.g. birthday gifts, red packets for weddings or birthdays) will also be put in.
On the income side, salary will be keyed in according to the timing of receipt as well as other miscellaneous income like rental and dividends. At this point in time I should emphasize — the timing of the cash flows is important if you are running a tight budget as most of the time salary comes in at the end of the month but expenses are ongoing. Thus, one can just run your mouse down to see if at any point during the month you dip into a negative balance. If so, then you should transfer some money from your opportunity fund to cover the gap temporarily.
In case I forgot to mention, I essentially have three "main" bank accounts. One is for operational expenses (day to day expenses) which includes food (meals), recharging of my EZ Link card, paying my bills and general entertainment. Another is a joint account with my wife which is usually quite static as it is reserved simply for common expenses like conservancy charges and utilities. The third is my emergency cum opportunity fund where I park my cash earning 0.8% per annum for quick deployment in case of investment opportunities. By having clear segregation, one can ensure one does not inadvertently "dip" into the opportunity fund to pay for indulgences and impulse purchases.
My personal practice is to transfer 50% of my take-home salary the moment it is credited in my bank account. This is essentially the practice of "paying yourself first" and I have been doing so for the past four years or so. One suggestion I can make here is to make payments through Internet Banking as much as possible as it will save on cheques and is much more efficient. My utilities and conservancy are on GIRO, while I pay my credit card bill and phone bill through Internet Banking. For cheques, I use those from CIMB as they are free of charge (POSB charges for the cheques).
For your information, I am using POSB/DBS for my spending account, UOB for my joint account and CIMB for my opportunity/emergency account.
CPF and Housing Loan Balances
Another important balance to track is that of your CPF. Everyone knows this is a uniquely Singaporean forced savings account, which can only be partially withdrawn at age 55 (and even then, only if it's above the ever-changing minimum sum!). Along with the CPF balance, I thought I would also mention the housing loan balance since I placed both on the same spreadsheet (but on different tabs).
Essentially, most people would use their CPF OA account to pay for the installments on their housing loan; therefore it is important to keep track of the OA account to know how much "buffer" you have in case you lose your job or get a pay cut. Ideally, there should be a positive amount being added to the OA every month, meaning the servicing of the loan drains less than the amount of contribution. But with housing prices rising relentlessly, this is becoming more and more of an impossibility as the contribution is capped at $5,000; therefore many couples may have to dip into their cash savings to top up their installment (this would probably apply to those who plan to purchase a very expensive 5-room DBSS apartment costing in excess of $700,000).
It is also important to track one's Medisave contributions and balance to ensure one has sufficient buffer for medical emergencies and also for hospital and surgical (H&S) insurance (the basic Medishield package can be purchased using Medisave funds). The current Medisave contribution ceiling is $41,000, after which additional contributions will be routed to the Special Account.
As the housing loan is an amortizing loan, it is important to build a spreadsheet which can at least project your installment up to six months to a year in advance. My loan is an HDB one and thus the rate stays constant at 2.6% per annum, but for those who took up a variable-rate loan package where the rate is pegged to SIBOR or SOR, they may wish to input the effects of a sharp rate increase to simulate an increase in interest expense and review if they are able to stomach the increase without undue financial distress.
Tracking the loan is also useful to simulate different scenarios of pay rises, pay cuts, retrenchments etc to see the effects on the ability to service the installments, and then cross-check it to the CPF OA account to determine if sufficient buffer is in place to weather a crisis. The buffer is built up usually through bonuses (but which are subject to the revised cap of $79,333 for 2011) and one good way to reduce the loan amount is to make lump sum repayments.
However, if you have a very cheap loan (<2%), then it may be more worthwhile to invest the money or just leave it in the CPF OA account (the first $20,000 earns 3.5% per annum risk-free). For myself, as my HDB loan amount as of this writing stands at about $75,000, I cannot refinance it at a lower rate through a bank and so it makes it worthwhile for me to pay it down through lump-sum repayments as far as possible, in order to clear the balance more quickly and be debt-free.
Investment monitoring (Market values and dividends)
Investments are an important aspect of one's finances as they will determine the amount of passive income which comes in every month, throughout the year. By "investments", I am referring to mainly equities or bonds which pay a predictable dividend or coupon at specific times of the year.
Tracking market values is actually secondary if you intend to be a buyer of long-term values, and if you intend to simply sit tight and enjoy the growth of the companies within your portfolio over the course of years. I find it useful to maintain a spreadsheet which tracks my total cost and market value at the end of the month or a certain period, to ensure that I adhere to my aim of capital preservation, and also to be able to monitor my additions to the portfolio over time as I accumulate funds.
I use separate sheets for purchases, tracking of daily market prices and index levels, as well as portfolio values and dividends. Suffice to say that my spreadsheet is pretty massive and complex and is all inter-linked so that I can have easy access to information regarding my portfolio and dividends at any instance.
Dividends are recorded by calendar year and receipt dates are keyed in once a dividend is declared, so that I can, at the same time, update my cash spreadsheet for the exact receipt date and amount based on my shareholdings. At this point, you can probably tell how one spreadsheet is linked to another, as the effects of one may result in changes to another. Rather than link up all this via formulae (which can go horribly wrong if cell references change or sheets are inserted/deleted), I usually input the amounts manually. One needs to have discipline and patience to track these numbers but over time you will get used to it, and probably even enjoy it!
Insurance portfolio and details
The fourth and very important aspect of tracking is one's insurance portfolio. Insurance is a necessity for everyone (in my opinion) as it will buffer you in times of emergencies and helps you to avoid large expenses. I have my policies and my wife's summarized on one spreadsheet, with separate tabs for mine and hers.
The spreadsheet should contain details of type of policy, insurer's name and contact details of insurance agent (financial planner), payment amount (whether monthly or annual, mode of payment and date if GIRO-deducted), coverage amount, and other salient details like whether it is pegged to inflation or is a reducing balance (for reducing term loans for example).
Essentially, the summary should be able to tell you at a glance what your total coverage is for various types of conditions like death, disability, TPD and accidents. Most important of all is the H&S policy (I consider this a compulsory policy for everyone) as the premiums are very low compared to the amount you need to fork out for just one hospital stay. I would strongly suggest paying a higher premium for private hospital stays in A class wards. When my daughter was hospitalized mid this year I easily earned back nearly 10 years of premiums.
An insurance portfolio should be balanced with term policies, H&S, endowment (should you choose one — I did not as I intend to invest the money on my daughter's behalf for her future education) and disability income. You should try to cover most aspects of your life which may cause financial difficulties if something happens to you. Remember also to include details of your beneficiaries — as one ages this will change as your parents may pass on or you may have more children.
Credit card balances
This is actually optional but I had included it as I know many people out there have multiple credit cards, thus it would be helpful if one could summarize each card's expenses in an easy-to-read spreadsheet, along with amounts and due dates. One has to be very disciplined about this and update the spreadsheet as soon as a transaction is completed which involves a credit card being swiped.
Readers may argue that the banks will send credit card statements so why track this manually? The problem is that so many statements with different formats and due dates can result in considerable confusion, and I have read of blogs where the bloggers have lost track of one or two statements and ended up having to pay not just late charges but also the accrued interest of 24% on outstanding balances past due date. One then has to go through the hassle of asking for a waiver. For myself, I only have one credit card and hence I do not practice keying in every transaction — I mentally am able to tally up the amounts I spend every month and will control my spending once it hits my pain threshold!
Net worth summary
This is by far my most important spreadsheet as it summarizes all the other aforementioned spreadsheets and consolidates and collates the information together. In essence, the net worth spreadsheet will incorporate all your cash balances in all bank accounts, surrender values of all insurance policies, market (monthly closing) value of all investments plus any other funds from other sources; this will yield a number which will represent your total assets.
Beside my total assets column is another column which measures the increase or decrease in the value of total assets month-on-month. Ideally, this number should be always increasing, assuming that you save much more than you spend. However, due to the volatile nature of equities and also bonds, the figure may thus fluctuate according to economic cycles, but the general trend should be upwards over the course of say 3-4 years (this is usually a long enough period of time to experience a full bear/bull cycle and hence will smooth out all fluctuations for market values). Do not be unduly distressed if total assets take a sharp plunge due to Mr. Market's mood swings — just focus on increasing your cash holdings every month and to plough some money into solid, well-managed companies, and over time the value of your total assets can only increase.
As proof that this can occur with disciplined savings and investing, in October 2005 (6 years ago) my total assets was just $41,000. As at end-October 2011, the total assets amount has touched $320,000 (this also includes my daughter's Government CDA-Extra account with OCBC Bank). That is nearly an 8-fold increase over 6 years and it could not have been accomplished without perseverance, sacrifice and a well-established investment philosophy (coupled with a little luck on the side too admittedly).
Finally, another column will show my HDB loan balance decreasing as the months go by, and thereby I can compute my net worth which is total assets minus all loans (in this case, I only have one mortgage loan). This figure has also hit an all-time high recently of around $245,000. Assuming my monthly expenses are about $3,000 a month, I would be able to sustain myself for about 81 months without additional income. One should think of wealth in terms of how long one's net worth can sustain oneself if both spouses stop work. This is how I have been measuring myself for the last couple of years.
Another method of measurement is to monitor my total dividends over the course of one calendar year to compute my average monthly passive income (currently, it stands at about $1,100 per month). If this eventually exceeds my monthly expenses, then in theory I would then have achieved financial freedom and can choose not to work. [Note: I did not include the market value of my primary residence in my net worth computation because to realize this value would imply that I would have to sleep at the void deck of my HDB block.]
Conclusion
As can be seen above, it takes some time to prepare and psyche oneself to monitor so many aspects of one's finances, but start slow and steady and soon you would enjoy the process of being in control of your finances. I have shared many personal details of myself which most people will not even share with their spouse, so I hope that this post will help people to organize their finances more effectively; as well as serve as inspiration for those who are just starting out in their career and wish to build up sizeable savings and investments as a prelude to retirement planning.
Although I must admit I am still a long way off from my target of half a million dollars by the end of next year, and passive income of $3,000 per month; nevertheless I feel I am progressing well on my journey and shall endeavor to carry on climbing towards the summit!
By Musicwhiz, who blogs at Value Investment. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.
Wow, congrats to our in-house writer!
(Btw, if someone has oready posted it, let me know, I will delete it; I don’t follow the forum too closely.)
http://sg.finance.yahoo.com/news/compreh...56432.html
How to comprehensively track your finances By Musicwhiz | Yahoo! Finance Singapore – Tue, Apr 3, 2012 4:45 PM SGT
When thinking about personal finance, a colleague once asked me if my wife and I keep track of our spending and our mortgage balance, as she was also keen to settle down with her husband soon and wanted to find out the proper way of managing finances. This made me do some soul-searching and think about how I was personally monitoring my financial life and what spreadsheets I had on me which helped me to achieve this.
Thus, this post is about the different aspects of one's finances which one should track in order to ensure most bases are covered and you do not receive a "nasty surprise".
The need for detailed tracking and documentation
You may ask yourself — why is there a need for detailed tracking, documentation and monitoring of one's financial status, and why must it be comprehensive? I am of the opinion knowledge is power. Being aware of your cash reserves, CPF balances, outstanding mortgage loan and investment portfolio would give you peace of mind that you are in control and that you have a grasp of what is going on in your financial life.
To do so requires meticulous tracking and the use of either a spreadsheet or a device for monitoring (for those who download apps on your smartphones). An additional advantage of being aware also means that you are able to react and not panic should there be an urgent situation or an emergency.
Cash and bank balances
This section is essentially the "lifeblood" of personal finance. It constitutes all bank balances in all bank accounts and shows the detailed cash movements made during the month. This is also the section where I do simple budgeting.
At the start of each month, I would input all my fixed expenses into the spreadsheet as a negative number (i.e. all GIRO automated payments like credit card bills, phone bills, utilities, conservancy charges, maid levy and insurance). The ending balance, if negative, will reflect the fact that I did not retain sufficient funds in my savings account to fund the month's expenses. Other budgeted expenses which are discretionary (e.g. birthday gifts, red packets for weddings or birthdays) will also be put in.
On the income side, salary will be keyed in according to the timing of receipt as well as other miscellaneous income like rental and dividends. At this point in time I should emphasize — the timing of the cash flows is important if you are running a tight budget as most of the time salary comes in at the end of the month but expenses are ongoing. Thus, one can just run your mouse down to see if at any point during the month you dip into a negative balance. If so, then you should transfer some money from your opportunity fund to cover the gap temporarily.
In case I forgot to mention, I essentially have three "main" bank accounts. One is for operational expenses (day to day expenses) which includes food (meals), recharging of my EZ Link card, paying my bills and general entertainment. Another is a joint account with my wife which is usually quite static as it is reserved simply for common expenses like conservancy charges and utilities. The third is my emergency cum opportunity fund where I park my cash earning 0.8% per annum for quick deployment in case of investment opportunities. By having clear segregation, one can ensure one does not inadvertently "dip" into the opportunity fund to pay for indulgences and impulse purchases.
My personal practice is to transfer 50% of my take-home salary the moment it is credited in my bank account. This is essentially the practice of "paying yourself first" and I have been doing so for the past four years or so. One suggestion I can make here is to make payments through Internet Banking as much as possible as it will save on cheques and is much more efficient. My utilities and conservancy are on GIRO, while I pay my credit card bill and phone bill through Internet Banking. For cheques, I use those from CIMB as they are free of charge (POSB charges for the cheques).
For your information, I am using POSB/DBS for my spending account, UOB for my joint account and CIMB for my opportunity/emergency account.
CPF and Housing Loan Balances
Another important balance to track is that of your CPF. Everyone knows this is a uniquely Singaporean forced savings account, which can only be partially withdrawn at age 55 (and even then, only if it's above the ever-changing minimum sum!). Along with the CPF balance, I thought I would also mention the housing loan balance since I placed both on the same spreadsheet (but on different tabs).
Essentially, most people would use their CPF OA account to pay for the installments on their housing loan; therefore it is important to keep track of the OA account to know how much "buffer" you have in case you lose your job or get a pay cut. Ideally, there should be a positive amount being added to the OA every month, meaning the servicing of the loan drains less than the amount of contribution. But with housing prices rising relentlessly, this is becoming more and more of an impossibility as the contribution is capped at $5,000; therefore many couples may have to dip into their cash savings to top up their installment (this would probably apply to those who plan to purchase a very expensive 5-room DBSS apartment costing in excess of $700,000).
It is also important to track one's Medisave contributions and balance to ensure one has sufficient buffer for medical emergencies and also for hospital and surgical (H&S) insurance (the basic Medishield package can be purchased using Medisave funds). The current Medisave contribution ceiling is $41,000, after which additional contributions will be routed to the Special Account.
As the housing loan is an amortizing loan, it is important to build a spreadsheet which can at least project your installment up to six months to a year in advance. My loan is an HDB one and thus the rate stays constant at 2.6% per annum, but for those who took up a variable-rate loan package where the rate is pegged to SIBOR or SOR, they may wish to input the effects of a sharp rate increase to simulate an increase in interest expense and review if they are able to stomach the increase without undue financial distress.
Tracking the loan is also useful to simulate different scenarios of pay rises, pay cuts, retrenchments etc to see the effects on the ability to service the installments, and then cross-check it to the CPF OA account to determine if sufficient buffer is in place to weather a crisis. The buffer is built up usually through bonuses (but which are subject to the revised cap of $79,333 for 2011) and one good way to reduce the loan amount is to make lump sum repayments.
However, if you have a very cheap loan (<2%), then it may be more worthwhile to invest the money or just leave it in the CPF OA account (the first $20,000 earns 3.5% per annum risk-free). For myself, as my HDB loan amount as of this writing stands at about $75,000, I cannot refinance it at a lower rate through a bank and so it makes it worthwhile for me to pay it down through lump-sum repayments as far as possible, in order to clear the balance more quickly and be debt-free.
Investment monitoring (Market values and dividends)
Investments are an important aspect of one's finances as they will determine the amount of passive income which comes in every month, throughout the year. By "investments", I am referring to mainly equities or bonds which pay a predictable dividend or coupon at specific times of the year.
Tracking market values is actually secondary if you intend to be a buyer of long-term values, and if you intend to simply sit tight and enjoy the growth of the companies within your portfolio over the course of years. I find it useful to maintain a spreadsheet which tracks my total cost and market value at the end of the month or a certain period, to ensure that I adhere to my aim of capital preservation, and also to be able to monitor my additions to the portfolio over time as I accumulate funds.
I use separate sheets for purchases, tracking of daily market prices and index levels, as well as portfolio values and dividends. Suffice to say that my spreadsheet is pretty massive and complex and is all inter-linked so that I can have easy access to information regarding my portfolio and dividends at any instance.
Dividends are recorded by calendar year and receipt dates are keyed in once a dividend is declared, so that I can, at the same time, update my cash spreadsheet for the exact receipt date and amount based on my shareholdings. At this point, you can probably tell how one spreadsheet is linked to another, as the effects of one may result in changes to another. Rather than link up all this via formulae (which can go horribly wrong if cell references change or sheets are inserted/deleted), I usually input the amounts manually. One needs to have discipline and patience to track these numbers but over time you will get used to it, and probably even enjoy it!
Insurance portfolio and details
The fourth and very important aspect of tracking is one's insurance portfolio. Insurance is a necessity for everyone (in my opinion) as it will buffer you in times of emergencies and helps you to avoid large expenses. I have my policies and my wife's summarized on one spreadsheet, with separate tabs for mine and hers.
The spreadsheet should contain details of type of policy, insurer's name and contact details of insurance agent (financial planner), payment amount (whether monthly or annual, mode of payment and date if GIRO-deducted), coverage amount, and other salient details like whether it is pegged to inflation or is a reducing balance (for reducing term loans for example).
Essentially, the summary should be able to tell you at a glance what your total coverage is for various types of conditions like death, disability, TPD and accidents. Most important of all is the H&S policy (I consider this a compulsory policy for everyone) as the premiums are very low compared to the amount you need to fork out for just one hospital stay. I would strongly suggest paying a higher premium for private hospital stays in A class wards. When my daughter was hospitalized mid this year I easily earned back nearly 10 years of premiums.
An insurance portfolio should be balanced with term policies, H&S, endowment (should you choose one — I did not as I intend to invest the money on my daughter's behalf for her future education) and disability income. You should try to cover most aspects of your life which may cause financial difficulties if something happens to you. Remember also to include details of your beneficiaries — as one ages this will change as your parents may pass on or you may have more children.
Credit card balances
This is actually optional but I had included it as I know many people out there have multiple credit cards, thus it would be helpful if one could summarize each card's expenses in an easy-to-read spreadsheet, along with amounts and due dates. One has to be very disciplined about this and update the spreadsheet as soon as a transaction is completed which involves a credit card being swiped.
Readers may argue that the banks will send credit card statements so why track this manually? The problem is that so many statements with different formats and due dates can result in considerable confusion, and I have read of blogs where the bloggers have lost track of one or two statements and ended up having to pay not just late charges but also the accrued interest of 24% on outstanding balances past due date. One then has to go through the hassle of asking for a waiver. For myself, I only have one credit card and hence I do not practice keying in every transaction — I mentally am able to tally up the amounts I spend every month and will control my spending once it hits my pain threshold!
Net worth summary
This is by far my most important spreadsheet as it summarizes all the other aforementioned spreadsheets and consolidates and collates the information together. In essence, the net worth spreadsheet will incorporate all your cash balances in all bank accounts, surrender values of all insurance policies, market (monthly closing) value of all investments plus any other funds from other sources; this will yield a number which will represent your total assets.
Beside my total assets column is another column which measures the increase or decrease in the value of total assets month-on-month. Ideally, this number should be always increasing, assuming that you save much more than you spend. However, due to the volatile nature of equities and also bonds, the figure may thus fluctuate according to economic cycles, but the general trend should be upwards over the course of say 3-4 years (this is usually a long enough period of time to experience a full bear/bull cycle and hence will smooth out all fluctuations for market values). Do not be unduly distressed if total assets take a sharp plunge due to Mr. Market's mood swings — just focus on increasing your cash holdings every month and to plough some money into solid, well-managed companies, and over time the value of your total assets can only increase.
As proof that this can occur with disciplined savings and investing, in October 2005 (6 years ago) my total assets was just $41,000. As at end-October 2011, the total assets amount has touched $320,000 (this also includes my daughter's Government CDA-Extra account with OCBC Bank). That is nearly an 8-fold increase over 6 years and it could not have been accomplished without perseverance, sacrifice and a well-established investment philosophy (coupled with a little luck on the side too admittedly).
Finally, another column will show my HDB loan balance decreasing as the months go by, and thereby I can compute my net worth which is total assets minus all loans (in this case, I only have one mortgage loan). This figure has also hit an all-time high recently of around $245,000. Assuming my monthly expenses are about $3,000 a month, I would be able to sustain myself for about 81 months without additional income. One should think of wealth in terms of how long one's net worth can sustain oneself if both spouses stop work. This is how I have been measuring myself for the last couple of years.
Another method of measurement is to monitor my total dividends over the course of one calendar year to compute my average monthly passive income (currently, it stands at about $1,100 per month). If this eventually exceeds my monthly expenses, then in theory I would then have achieved financial freedom and can choose not to work. [Note: I did not include the market value of my primary residence in my net worth computation because to realize this value would imply that I would have to sleep at the void deck of my HDB block.]
Conclusion
As can be seen above, it takes some time to prepare and psyche oneself to monitor so many aspects of one's finances, but start slow and steady and soon you would enjoy the process of being in control of your finances. I have shared many personal details of myself which most people will not even share with their spouse, so I hope that this post will help people to organize their finances more effectively; as well as serve as inspiration for those who are just starting out in their career and wish to build up sizeable savings and investments as a prelude to retirement planning.
Although I must admit I am still a long way off from my target of half a million dollars by the end of next year, and passive income of $3,000 per month; nevertheless I feel I am progressing well on my journey and shall endeavor to carry on climbing towards the summit!
By Musicwhiz, who blogs at Value Investment. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.
and so, he already has the necessary basic skills to perform meticulous tracking of finances using tools like spreadsheet. Most people do not even know how to use a spreadsheet.