Financial Planning 101 For Beginners
What is Financial Planning?
It is about taking control and managing your finances for a healthy cash flow. Financial planning is unique to every individual as each of us has different priorities. Some of us might be driven to become one of the wealthiest, there are also some who focus on goals that will make us happy. Although we know that owning tangible assets like getting a branded bag, a car and a bigger house do not necessarily increase our level of happiness, we still do it anyway and spend most of our money there. Therefore, depending on our preferred types of lifestyle, we should draw the lines as to how much money do we need to sustain that.
Managing Your Money By Tracking Spending
Before you start on your financial plan to manage your money, you need to track where you spend your money on. You will not know how much you should spend on certain things and how to allocate those budget if you do not have prior data. Hence, the first step should be gathering data. Just like what I have learnt from doing Facebook marketing, you will not know how much budget to allocate unless you have tried and tested it for some time.
To start to gather data, you could record your expenses for a month to get enough data to start allocating various budget.
Allocate Your Budget
With your data collected, you can now allocate your expenses into variable and fixed costs. Fixed costs will be constant expenses like memberships, car loans, phone bills. Although fixed costs, as the name suggests, are not exactly easy to minimize, we should still review them with the Needs VS Wants theory. Club memberships, music portal memberships, gym memberships – are these needs or wants? Could you do without it? Are there any other alternatives? This is important because it would be recurring. If your music membership costs $10 per month, it would add up to $120 per year! Do think about your fixed costs and minimize them as much as possible.
Next, variable costs such as entertainment, dining out, movies etc. I understand that in Singapore, you have to pay for almost every other activity out of your home. However, as these are variable costs, do allocate a reasonable budget for yourself. After all, it is the experiences that count in your life. You need not splurge excessively on creating wonderful experiences only to find yourself in debt next time. Always seek for a balance in life and have fun within your means.
Managing Your Wealth Beyond Cutting Expenses
More often than not, most people look at cutting their spending but neglected wealth creation. Besides minimizing your expenses, you have to also look at how you can increase your income. As technology advances, there are many ways to earn the extra buck online – freelancing, dropshipping, affiliate marketing etc. Besides active income, do look into building passive income. Passive income means having your money to work for you. It is usually in the form of investments – dividend payouts, interests etc.
Most of us often overlook passive income, simply because we are “too busy” to think about passive income. Many of us are relatively myopic to only look at our short term gains like how to get more active income etc we would forget to let our idle money grow, only to find out years later that inflation has caught up.
All in all, financial planning involves three key steps:
- Identifying your fixed and variable expenses. Review them from time to time and look at what is of priority.
- Increase the number of income streams and know the resources you need to meet these goals.
- Managing the resources you have and most importantly, let your money work for you!