Saturday, June 30, 2007

Starting out...

Beginning of this month, my former university, Multimedia University (MMU) has unleashed upon the working world a new batch of fresh graduates from various discipline. Being new and enthusiastic, these graduates rushed into employment and with their new found wealth, they start to think about getting more things such as a car, new clothes, new mobile phone, etc. Without calculating their finance commitments and making efforts to understand the car loan structure as well as the cost to own a car, these new working individuals rush head on to secure their first MyVi (Since this is the best bang for the buck at the moment). I can't really blame them for their lack of financial planning since I would be doing the same thing if I didn't join Great Eastern.

The reason I brought this up is because of the conversations I had with a few of my juniors whom have started working as well as some of my fellow course-mates for the past week. (The older people I met are also bad financial planners but as a case study for this entry, I have opted to talk about young working adults). Practically none of them actually calculate their expenses. The only way they know they have used up their money is when their mullahs in their banks have "mysteriously-vanished" and they have to survive on bread and water till their next paycheck comes in. When this happens, they will rant about not having enough money to spend and they can't afford to go for a vacation in Australia. Sounds familiar? To avoid such predicaments in the future, you can take a few simple steps listed below which worked for me.

Step 1: Start writing down every cent you've spent and balance your account at the end of each week
(I can already hear some of you saying,"What? Writing down every cent I spend! That's impractical and downright stupid!")

Before you go into a frenzy to shoot down my suggestion, read on. We, human beings are very visual oriented beings and we usually act upon seeing something tangible (just like goals setting but that's for another entry) only do we realize the implications and take concrete steps to address the issue. A very simple analogy would be our usage of shower cream. Each time you take your bath, you'll see that the shower cream decreases by a small amount. This will go on until one point in time when you notice your favourite shower cream is going to run out in a day or two and naturally you will visit your nearest hypermart to get a new one (or risk not being able to shower!). You only realize you're running out of the shower gel because you constantly look at the bottle each time you take a bath. The counter we use to keep track of the gel usage is by looking at the content level in the bottle. Similarly, do you constantly look at your 'finance bottle' each time you spend? Do you have a visual counter to keep track of your 'finance bottle'? By writing down every cent you spend and balancing your account sheets at the end of each week, you will clearly know where your money goes and identify where to cut down. We all know by default that in order to save, we need to reduce our expenses. My question to you is, how would you know where to reduce when you have no idea where your money is going to? I admit it's quite hard and requires a fair bit of discipline to jot down your expenses every day but once it becomes a habit, it will be easy. Once you get this done, you will find that the act managing your expenses isn't as difficult as you thought.

Step 2: Cut your cloth according to your size

To illustrate this point, I will use an example as a case study. Ms. X, a fresh graduate of age 22 who is working in a Multi National Company (MNC) has a pay package of RM2,200 and covers her medical expenses via company group insurance. After deducting 11% for Employee Provident Fund (EPF), she's left with RM1960 (for simplicity sake, I've rounded up the figure from RM 1,958). Now Ms. X has to pay for her rental RM250/month and her conservative daily expenditure on food is roughly RM 20/day which totals up to RM 600/month. Throw in another RM 200 for miscellaneous expenses (monthly phone bill, electricity/water bills, groceries and occasional movies) and her Government Study loan repayment of RM 150, now she's left with RM 760. Having not exposed to the concepts of financial planning, she decides that she must and can afford a car with her new found wealth of RM 760. Without much thinking, Ms. X decided to buy her dream car, the Olive Green MyVi with full accessories and automatic transmission that costs RM 49,000. Knowing her parents will help her fork out RM 9,000 down payment for her new MyVi, she went ahead and secured a RM 40,000 car loan with 4.2% interest with repayment for nine years. The Perodua car salesman happily calculated for her that she will only need to pay a mere RM510/month for 9 years. Considering that she only drives a short distance to and from her office, she assumed that RM 250 is more than adequate to pay for her petrol expenses.

So far, everything seemed fine with the way she manages her money right?

I don't deny that there are certain expenses that can't be avoided such as the absolute need for a car, daily food expenses as well as room rental but Ms. X totally blew her planning by over committing herself. Instead of getting a car that suits her budget, she went for a RM 49,000 MyVi. She did do her math and factored in the monthly expenses of her car but she forgot about the car maintenance (car servicing, replacement of consumables such as brake pads, spark plug, engine oil, tyres, etc). Take note that purchasing the car is never an issue, but the cost of taking care of a car is. Plus, she totally neglected her retirement and the necessary insurance policies/trust/will which are crucial for wealth protection. (I will not go into that as that is a whole topic by itself) My advise would be for Ms. X to get a smaller and cheaper car which is low on fuel consumption, cheap spare parts and reliable built
(that practically rules out Proton and any Korean made cars) such as a 660cc Kancil (RM 22,500) or 850cc Viva (RM 32,500) if it is absolutely necessary. After all, she only needs a car to get around town, why would she need such a large car? Besides, our little lassie here must cut down on some of her expenses may it be her weekly clubbing or her food expenses or her love for shopping. This is where the daily expenses account sheet from step 1 will come in handy to assist you to identify where you can cut down on. The reason is simple, if you don't start saving now, you will never be able to as your salary grows, so will your commitments. By the time you realized you need to save, it's probably too late and you will have to work way beyond your retirement years just to support your cost of living. (I will not dwell into this topic as it was adequately covered in my previous posting of the article "Save young or Save Like Crazy").

Step 3: Avoid temptations!

No, I'm not talking about temptation of the flesh and lust. I'm talking about the temptation to spend when you have some extra cash in hand. It's never easy to resist temptation so the best option is the avoid the situation where you will be tempted. This can be done by simply by having multiple accounts with different banks and label them accordingly. For instance, I have an account with Maybank that used for daily transactions such as payment for bills, payment of commission as well as a means for my beloved and much appreciated clients bank in their insurance premiums. Obviously, this Maybank account has an ATM card, large network of branches and online banking account that enables me to access the money easily. I designated this account to be "General Account". Knowing that I will be doomed to spend whatever savings I have in here, I went to OCBC to open a current, savings and fixed deposit account. I labeled these accounts as "Savings Account". Whatever extra I have in my Maybank account will be deposited in my "Savings Account" in OCBC. For this account, I too have an ATM card but I chose this bank because it has very limited branches nationwide and they charge a whopping RM 8 if I used other banks' ATMs for any transaction. Thanks to this arrangement, whenever I have the urge to spend the savings I have in my "Savings Account", I will be deterred by the hassle I have to go through or the ridiculous service charge they impose if I use my ATM card elsewhere. The final account which is my Fixed Deposit, is my "Untouchable Account". It will always be on a half yearly basis and my standing instructions would be for them to automatically renew the FD term once it reaches maturity. The purpose of this money will be for future use such as the purchase of a property/wedding/children's tertiary education. So, whatever extra I have from my "Savings Account" will be transferred into my "Untouchable Account" after six months. Please take note that this method is not "temptation-proof" per se but with a pinch of discipline, such an arrangement has helped me to minimize the urge the spend and ultimately, I was able to have some savings. (no matter how little it is. I have to start from small amounts right?)

This three steps have worked for me thus far after I have started working for a year and I'm proud to say that I have managed to stay afloat despite my fluctuating income. This is not the most ideal way but it's a start and I hope it will work for you too! Cheers!


drumsticks said...

Hey Nick,

Good handy and practical tips to save money, esp step 3.. i will just have to try it out one day when i'm earning. Btw, how did you thought it out? i think that's brilliant.

Unka Chan said...

Hi Drumsticks...

Thanks for visiting my blog! :)
I thought of it when I was still and undergraduate. I figured if I wanted something bad I would have to save for it since I'm too busy (more like lazy :p ) to take up part time work. I created two bank accounts; one of which is my "General Account" and the other is my "Savings Account"...that's where I got the idea from. :) You can actually start doing so while you're still in MMU. :)