Why You Need to Do a Personal Cash Flow Forecast

In the 2012 Global Finance Who’s Who in Treasury & Cash Management Survey, it is stated that more than 60% of the organizations formally assess or monitor their cash flows daily to meet operating requirements. While you do not need to do it daily it is wise to do it once a month for the next three months to be on top of your personal finance. A cash flow forecast, as its name implies, is to estimate your future cash flow situation. The whole purpose is to manage early in case of a shortfall in the near future.

Here is a simple cash flow forecast statement. For simplicity, it is assumed that you are not using credit cards. You are now at the end of October 2012 and you have prepared for a three-month forecast for the next three months:

Cash Flow Forecast

November 2012

Cash Inflows

Where are your sources of income in the form of cash? It can be your salary, income from part-time work, and dividends from stocks and shares. In this example, your take-home pay is your only cash inflow which is $6000.     

  

Cash Outflows

It is a good budget because there is no overspending and there is also an amount of $600 set aside for savings.    Other expenses vary from month to month and they include such items as eating out, gifts, clothing, minor car repairs, and donations.

Net Cash Flow

In the month of November income equals Expenses, so it is zero balance.   

Balance B/F

It is assumed that in the current month, your actual income ties with total cash outlay so there is no surplus fund to bring forward to November 2012, so the balance brought forward is zero.

Balance C/F                 

There is no money to bring forward to the month of December.   

     

December 2012

There is a special item in December. You are going for a Christmas holiday and you have budgeted for an amount of   $2000. Your cash flow forecast clearly shows that you are short of exactly 2000 in the month of December. You will have to decide now if you are going ahead with your holiday you will need additional funding.

January 2013

There is another shortfall of $1500 in January 2013 because your car insurance is due in January. If you have set aside $125 per month every month you would have ready cash of $1500 by January 2012. Since it is not done, you will have to look for additional cash of $1500.    

 Now

The forecast tells you that you need an additional fund of $3500 to meet expected expenses in the next three months. For those who have included savings as an expense item in their monthly budget, there is no problem; all you need to do is to draw from your savings.  Without saving you can either draw from your emergency fund or liquidate part of your investment. When you do not have other sources of ready cash you will need to borrow or apply for a personal loan now and get into debt. You do what you need to do now and avoid getting into a panic situation later.

7 Goals of Personal Finance

Personal Finance

Personal financial planning involves more than just living within your means. You have to start early to save for many purposes in life. There are goals such as buying a car, a house, maximizing your investment to accumulate a fund for children’s education, and retirement. You also need to avoid or reduce the risks of losses to your wealth and earning power. Lastly, you need to make an arrangement to distribute your wealth in an orderly fashion before you are no longer around. Here are the seven goals in personal finances:


1. Eliminate high-interest debts: The first all-important goal is to get rid of all debts. Don’t think that you still can save while having high-interest debts such as credit card debts. The amount of interest earned which is way below 4% for your FD compounded annually just cannot keep pace with 18% interest charged on your cards compounded monthly Just remember that compound interest is a double-edged sword. At this juncture spend only on basic necessities until your outstanding debt is fully settled.

2. Budget: A budget is to allocate your spending within the limit of your income. A meaningful budget is one that includes savings, household expenses, and other monthly commitments such as insurance, installment payments. Follow the budget faithfully to avoid impulsive and unplanned spending

3. Income: The goal in this area is to increase your take-home pay from your normal employment. The other area to look into is to create passive income streams. One common source of passive income is to collect rent from a property. The ultimate goal is to work less and earn more.

4. Expenses: One way to track your expenses is to look closely at your monthly credit card statements. Identify expenses that you can go without or reduce. Take advantage of tax relief and rebates to reduce your tax liability. Be able to distinguish between good debts (such as a loan to buy a house) and bad debts (use your credit cards to buy what you want and pay only the minimum amount).

5. Savings: Take advantage of regular savings and start saving early and allow compound interest to work wonders for you. The money you have saved is to earmark for down payments for a car and a house. Part of the savings is also used to invest and create a fund for your children’s higher education and for your own retirement

6. Protection: It is to safeguard your wealth such as your house from fire and other damages. Buy adequate property insurance coverage so that the risks are passed on to your insurers. You also need insurance coverage to reimburse you for accidental and medical expenses and disability to carry on gainful employment

7. Estate planning: The aim of estate planning is to arrange in advance the transfer of your wealth to those you have in mind in a hassle-free way


Personal financial management is a long-term activity. Things cannot happen overnight especially savings and investment. Be disciplined to monitor your personal finances on a regular basis. Make changes to suit changing conditions as you move along in life. The most important thing in life is to avoid gambling and not incur unnecessary debt. These will lead to bankruptcy eventually.

Source: 7 Goals of Personal Finance

7 Advantages of a Debit Card

Debit Card

According to a news item in the paper, more and more Malaysian are using debit cards and debit card spending has increased by 50% year-on-year. A debit card offers many benefits:

1.      Better Control of personal finance: A debit card allows you to spend only on what you have. You can use your debit card to spend according to your budget.  However, a credit card, without using it wisely, can lead to bankruptcy.

2.      Safer: You don’t have to carry a lot of cash when you go shopping, you avoid getting robbed.

3.      Simple life: With a debit card shopping is hassle-free. There is no need for a buyer and a seller to count cash and avoid errors.

4.      Shop online: When you have a debit card, you can shop online. It is just like a credit card. 

5.      Avoid running out of cash: There is no need to look for a bank or an ATM when you are short of cash, just use your debit card.

6.      Supporting documents for your spending: It is easy to monitor your spending because there is a slip for each and every transaction.

7.      Worldwide acceptance: Like a credit card, it is accepted internationally and you can withdraw local currency from ATM when you are overseas. 

You need to monitor your spending and avoid getting into an embarrassing situation when a transaction cannot go through because there are insufficient funds in your bank account.

Source: 7 Advantages of a Debit Card.

12 Easy Ways to Reduce Your Expenses

The output of agricultural products is affected by weird weather and it is costing more just to get the basic items such as wheat, rice, and chili. There is, all the more, a need to trim your household expenses.  Look closely into your spending pattern and adjust your lifestyle to shield the impact of the rising cost of living.   

1. Insurance premiums: Find out if you are over-insured. Avoid paying too much for personal accident coverage because you have many friends who are insurance agents and you just want to oblige them.

2. Children: Are your children working now? If so, let them pay for their own personal expenses. You love your children but they have to be financially independent. 

3. Technology: Do take advantage of the Internet. Use email instead of telephone or cell phone.  Pay your recurring bills online. Make online purchases as far as possible. You save time and save on transport and related costs. You can also read or download books on the Net instead of buying the actual books.

4. Avoid debt: One effective way is to stop getting what you want on credit. Without credit, there is no debt and hefty interest charges.

5. Medical expenses: Apart from getting adequate insurance coverage, the best assurance to avoid medical expenses is to keep fit and be healthy. You don’t have to enroll for a gym membership, Jogging, cycling or brisk walking is even better. Instead of staying indoor, you exercise and at the same time, you breathe in the fresh air.

6. Telecommunication package: Are you able to get your Internet access provider to bundle with free local and outstation calls? You save on calls among fixed-line subscribers while you surf the Net. In Malaysia, Telekom Malaysia Berhad is able to provide packages for Internet access through Streamyx with free calls among fixed lines.

7. Food: Eating at home more often is the surest way to trim food costs. Drink water instead of sugary drinks. Moreover, home- cook food and water are good for your health.

8. Entertainment: You can cancel your subscription to satellite or cable TV. The free channels are more than enough to kill your leisure time. You can even watch movies on the Net.

9. Utilities: The key is to control the wastage of water and electricity. Whenever possible use the fan instead of the air-conditioner.

10. Car maintenance: Can you live with just one vehicle?  You will save a substantial amount on vehicle maintenance. Always inflate tires for optimum performance. I check tire pressure once a week for a better and smoother ride.

11. Shopping: Go shopping with a list and stick to the list. Do it once a week and use coupons for further savings. Buy apparel for durability and comfort and not shop for expensive brands. Do it during sales.  Get a house brand for everyday items to reduce your household expenses.  

12. Avoid bad habits: Can you kick the habits of smoking, drinking, and gambling? Just think of the amount you can save and the benefits of better health to go along with it.

Reducing expenses is to save even more for rainy days. However, it is equally important to open up more income streams. There is a Chinese saying-开源节流. It means you open up more sources and reduce outflow.      

Source: 12 Easy Ways to Reduce Your Expenses

10 Essential Things About Money

Money is a scarce resource; you need to manage it wisely to enjoy financial freedom. These are the ten things to look into to achieve financial independence:  

1.       What’s your financial position now: Are you the true owner of your wealth such as your home and your cars? Or is it the bank? Do a computation of your net worth to see if the bottom line is positive (you are the true owner of your wealth- you own more than you owe) or negative( you are deeply in debt and the banks own your house and motor vehicles). This is the starting point to take the next step – to set meaningful financial goals

2.       Set goals: The first thing you do is to design a budget. The aim is to settle the debt (if you are in debt) as soon as possible and to ensure that at the end of every month there is a surplus fund available for savings and investment. Budgeting is a balancing act. When you allocate too much in one area, say food and household expenses, you may end up not having money left for entertainment. When you try to save more, you may not have sufficient funds for essential items.

 Reduce debt: The most important objective of personal finance is to clear your debts as quickly as possible. If left unattended, interest on interest will snowball the outstanding amount to such a huge sum that you are unable to handle.

3.       

4.       Reduce expenses: At the same time, take a good look at your expenses and see which area you can trim further.  Develop good habits of sticking to your budget and avoid spending on impulse especially on material things that you want but not essential. Be smart in using credit cards.  The key is to avoid credit and debt but to take advantage of credit cards to pay less on purchases made. Settle your credit card bills promptly and fully every month to establish your creditworthiness. Live within your means to avoid debt and incurring interest. Reduce your income taxes by taking advantage of applicable deductions.

5.       Save: The surplus fund that you have saved serve two important areas apart from retirement and children’s education. The first one is the setup of an emergency fund to last three to six month’s living expenses. In case you are out of work, you are still able to maintain your living standard until you find a new job. The other thing is to save and buy big-ticket items that you have in mind like a new TV to replace the set which breaks down frequently. Save and buy is better than buy now and incur debt and interest.

6.       Build wealth: There is a quick and simple way to find out how quickly your money will grow. This is the simple rule of 72. It tells you when your money will double at a given interest rate. At 10 % it will take 7.2 years and at 6% it will take you 12 years. Just divide 72 by the interest rate. Think and consider other vehicles of investment, according to your risk-tolerant, to grow your money. Find out more about bond funds, mutual funds, stocks and shares, and  real estate investment

7.       Fund for retirement: It is easier to set aside money sooner to save and invest for retirement because a smaller amount is needed rather than later.

8.       Fund for children’s higher education: It is also necessary to save early and allow compound interest to accumulate a fund for your children’s tertiary education.

9.       Insurance protection: Life is full of uncertainties. It is a good move to take up a life policy to cushion the blow in the unfortunate event that you are no longer around to look after your spouse and children. The proceeds from the policy allow your family to carry on living without financial difficulties. You also need to consider Insurance protection against disability due to serious accidents and health insurance to cover critical illnesses. It is also necessary to protect your dwelling and its contents again such perils as fire and flood.

10.   Estate planning: Over the years you will have accumulated more  wealth, it is never too early  to draw up a will to allow your estate to be distributed to your loved ones  according to your wish in a hassle-free way,

While you take care of money matters, don’t forget to look after your health, invest in further education, and appreciate what you have in life. Have fun and be happy.

Source: 10 Essential Things About Money

7 Effective Ways to Avoid Bankruptcy

Bankruptcy

According to the president of the Federation of Malaysian Consumers Associations (Fomca), Datuk N. Marimuthu, half of those declared bankrupt because of credit card debts are below the age of 30. How do you avoid being declared bankrupt?

1.      Financial Education: it is essential to start young to learn about personal finance. Getting more information about savings, household budget, net worth, proper use of credit cards, good and bad debt, insurance, and estate planning are necessary to be more knowledgeable about managing money.

2.      Budget: The key is to plan your budget and work your budget diligently.  The main objective is to match your expenses including regular savings, housing, and hire-purchase loans within your take-home pay. The outcome is to avoid overspending and falling into the debt trap.

3.      Emergency Fund: The beauty of an emergency fund is like a first aid kit. It is to address unexpected happenings such as getting retrenched or incurring expenses due to an accident or an illness.  The money will tide you over the critical period to meet all your normal monthly expenses for a couple of months until the situation is back to normal.

4.      Avoid bad habits and more wants in life: Gambling is the fastest route to be bankrupt.  Avoid it at all costs. Do not spend more than what you have. Self-discipline and self- control are required to curb the urge to get more wants. If it is beyond your control, you will get into debt and likely to be bankrupt.

5.      Avoid using credit cards: This is especially true for those young graduates who have just entered the job market. The smart way is to use a debit card to get the feel of using a plastic card. When you use a debit card, the amount that you charge to your card is directly deducted from your bank account. The amount that you can spend on your card is limited by the fund available in your account. There is no way to overspend and get into unmanageable debt.

6.      Pay in cash: Instead of getting a personal loan,   save for the amount to buy big-ticket items you need.

7.     Increase your earning power: When you want to spend more just earn more. Learn and equip yourself with more marketable skills. Utilize your expertise such as writing skills to create part-time earnings. Write articles for newspapers and magazines. Turn your hobby like photography into a source of income as a photographer. Invest wisely and create  passive income streams 

Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.

Source: 7 Effective Ways to Avoid Bankruptcy

Image source: https://www.moneycrashers.com/declare-file-bankruptcy-process/

10 Effective Ways to Establish Your Creditworthiness

Now that America is out of the AAA list, there are only 15 countries in the world with AAA ratings from S and P. Singapore is the only Asian nation with such a prestigious rating. China is only rated AA-. How do you establish a personal rating as good as triple-A? Here are the 10 ways to get it:


 1. A regular source of income: There must be a regular source of income. It means you are holding a job or you are running your own business with a steady income. There must be documentary evidence of your earnings such as your pay-slip or your tax returns.

2. A permanent address: This is the place where you live and you are not moving around frequently. It shows that you are stable and well-established.

 3. Create a credit history: When you do not have a credit history, it is perceived by bankers that you are not trust-worthiness to obtain a loan. Get a small loan and settle the loan in a timely fashion. There you are. You have just created a perfect credit history.

 4. A Current account: Operating a current account is another way to establish your creditworthiness. Keep your record clean by not issuing bounced checks. It is an indication that you are capable of managing your financial affairs.

 5. A Credit card: Having a credit card is an excellent way to build a firm foundation for your credit rating. As long as you always pay on time and pay the full amount, it confirms the trust in you by financial institutions.

 6. Pay bills promptly: Do not delay payments; it affects your credit rating negatively. It is an indication that you are not in full control of your life and finance.

 7. Avoid skipping payments: It is the worst thing you can do to destroy your credit rating. It is a sign that you are in financial problems and you are putting creditors on alert.

 8. Low credit card balances: A high credit card balance means you are spending more and paying less. It is a concern for a creditor.

 9. Keep debt within 30% of your monthly income: Are you building up more and more debt? When you have more debt, it means you have less to spend on your essential items. There is a danger that you may not be able to service your debt.

 10. Budget for it: Your budget should cover all monthly installments payments so that you will pay fully and promptly to protect your creditworthiness.


 Is your credit rating as good as AAA?

Source: 10 Effective Ways to Establish Your Credit Worthiness