Personal Finance Management - A Practical System to Managing Your Money
Do you save your money? If you do, how many bank accounts do you put your money in? If you're like most people, you probably have just one single account or two at the most. Personally, I have a total of seven bank accounts - four savings accounts, two current accounts and one fixed deposit account. You may think I'm crazy or you may think it's too tedious to manage that many accounts. But I can assure you this is the best way to manage your money and it's definitely worth every ounce of the effort. The reason I have my money in so many accounts is to ensure I'm not spending more than I should, that I'm able to pay my credit card bills on time, that I'm putting enough money aside for rainy days, and that I have surplus to invest. However, I'm not saying you should have seven different accounts like me. What I'm saying is you should decide the number of accounts based on your own needs, with each account catered for a specific purpose. All I'm doing is to give you an example to follow. In Singapore, banks will usually charge you a monthly service fee (usually S$2) if your daily average balance falls below a minimum amount. But I'm more than happy to pay this fee because the advantages I gain from properly managing my money more than offset the small amount of fee I need to pay. Having said that, I still choose more savings accounts than current accounts because the required daily average balance for savings accounts is much lower than current accounts, which is easier to meet. And the reason for having current accounts is because I need to issue cheques at times for both my business and personal purposes. So remember to check with your banks the minimum balance required and the service fee they charge. Now let me explain how I manage my money with my multiple accounts. 1. Central & Business Account (Current Account) Currently, I have only one source of income, which is the commission I receive from brokering real estate deals as a real estate agent. Every month, all my commission income will be deposited into this account before I distribute them to other accounts accordingly. But before I do that, I'd save between 15 to 20 percent of the amount in this account as my real estate business monthly expenses. After which I'd transfer the remaining amount to other accounts through Internet banking. For this account, I'd usually be able to avoid the service fee because my balance in this account would usually meet the minimum requirement, except occasionally. 2. Personal Expenses Account (Savings Account) As a self-employed, you're essentially your own boss. Nevertheless, you still need to pay yourself a fixed monthly salary. This fixed amount is mainly to control your monthly expenditures so that you won't overspend. The key is to allocate an amount that's enough to cover your basic necessities and perhaps a little extra for some leisure activities. You may need some discipline to stick to only spending the amount available in this account because there is definitely temptation to spend the money in your other accounts when the money in this account runs out. The way to counter this is to have just one ATM card. You should destroy all the other accounts' ATM cards or simply tell the banks not to issue you one. I understand there's also the credit card temptation. So let's move on to the next account. 3. Credit Card Payment Account (Savings Account) You may already know by now that credit card can be a dangerous financial tool. But that is only true if you abuse it. On the contrary, it can be a great wealth enhancement tool if used properly because you can accumulate bonus points with your purchases. And you can use these points to redeem for free products and services like shopping vouchers, dining vouchers, extra flyer miles, petrol vouchers, etc. I have since accumulated a few hundred dollars worth of petrol and this helps me to save even more money! The money in this account is to pay for all my credit card bills. This is a very important account because it ensures that I have the money to clear my credit card bills on time so I don't have to pay exorbitant interests to the issuing banks. This is how I make sure I'd have money in this account to pay for the bills on time. Whenever I make a payment using one of my credit cards, I'd transfer the payment amount from one of my other accounts to this account the moment I reach home. If the item I bought were for personal use, I'd transfer the exact amount from my personal expenses account to this account. In doing so, the amount in that account would have been reduced and in such case, I won't overspend because I now have less money in the expenses account for my disposal. If the item were for business purpose, then I'd simply transfer the money from my Central & Business account to this account. Never delay transferring the money or you'll forget about it. That could be dangerous. Always transfer the money once you get home. If not, do it the next day at the latest. Remember... it is extremely important to clear your credit card bills on time because this habit can make or break you. And also to always stick to spending only whatever you have in your personal expenses account for the month. 4. Car Expenses Account (Current Account) Apparently, you need this account only if you own a car. If you do not own a car, then just include your monthly transport expenses in your personal expenses account. I separate my car expenses from my personal expenses because if I combine the two expenses in one account, I may spend more than I should on my personal consumption like entertainment or new clothes, and leaving little money to pay off my car loan, insurance, etc, at the end of the day. There's always temptation to spend more when you have more money at your disposal. The principle to having this account is the same as having the credit card payment account, which is: CLEAR YOUR DEBT ON TIME! Put the money for anything you're paying that is related to your car - petrol, grooming, road tax, servicing, etc - into this account. You have to estimate how much you're paying for each of the listed items on a monthly basis and simply put that amount into this account every month. For example, if your yearly insurance premium is $1,200, then simply save $100 in this account every month so that you'll have the money ready when the time comes for renewal. For other car expenses that do not have a fixed sum, like petrol or car servicing, you just have to make an estimation and save the amount according to your estimation. Initially, you may under-save or over-save for these expenses, but it's ok. Over time, you'll have a more accurate estimation. To be safe than sorry, choose to over-save. 5. Miscellaneous Account (Savings Account) Life is not just about work and saving for the future. We all need to pamper our loved ones and ourselves from time to time. Just don't overdo it and you'll be fine. Whatever my income is for the month, I'll put 10 per cent of it into this account. You can choose whatever amount you're comfortable with, but I'd suggest no more than 20 per cent of your income for this account. If you need to go below 10 per cent, do it! You can use the money in this account for travelling, buying a new tv, new clothes, new bags, new shoes, etc. I'd also use this money to buy gifts for birthdays, weddings, anniversaries, Valentine's Day, and during the festive seasons. A lot of people tend to give priority to pampering themselves because human beings have a great penchant for instant gratifications. So the purpose of this account is to control over pampering yourself. UNDER NO CIRCUMSTANCES should you use the money in other accounts for what this account is intended for. If the money in this account runs out, then just STOP pampering yourself until it's been topped up. And DO NOT succumb to the desire to put more money than you should into this account. Otherwise that would defeat the purpose. 6. Emergency Fund Account (Fixed Deposit) Many personal finance gurus advocate the setting up of this fund and I absolutely agree with it. By far, this is the most important account because we are living in a world full of uncertainties and we have to always be prepared for the unexpected. And since this is the most important account, always allocate a portion of your income into this account first before any other accounts until you've reached your target. While some experts say you should keep aside enough money to sustain for at least 6 months should you unexpectedly lose your job, I personally prefer to keep aside enough money to sustain myself for 12 months. I'm not there yet, but I'm steadily accumulating it. Some experts also say that the amount should be the multiplication of your monthly income rather than expenses, but I think a multiplication of your monthly expenses is good enough. For example, if your income is $3,000/month and your monthly expenses are $2,000, an emergency fund of $24,000 (12 months of expenses) is good enough. And saving $24,000 is easier than saving $36,000 (12 months of income), although it's still pretty challenging. Nevertheless, it's not mission impossible. Keeping aside 12 months of expenses is just my preference. You may choose a figure you're more comfortable with. But the recommended minimum is 6 months of expenses. There are investors who keep their emergency fund in investment instruments like bonds, stocks, money market funds, etc, but personally, I prefer to keep it in cash. So you have to decide which is the best instrument to safe-keep your emergency fund. Take note, the keyword here is safe. 7. Investment Account (Savings Account) This is a must-have account because if you don't set aside money to grow your nest, you'll forever be struggling financially. But why is this not the most important account? Because you should invest only with money that you can afford to lose. As a matter of fact, this will become the most important account once your emergency fund account is fully funded. You should start investing only after you've accumulated at least 6 months worth of expenses in your emergency fund account. Before that happens, save money in this account simply for your insurance. You can use the money in this account to pay for your insurance premiums, as insurance should be part of your overall investment plan. However, when you're ready to invest, do your due diligence to research thoroughly the kind of investments that suit your financial appetite before you commit to any investments. Do it like how you would before you buy your first car. Never make the mistake of putting your money into something you do not understand 100 per cent. You may need some time to conduct the research and analyse all your available choices of investment instruments, so it's good to build your investment arsenal while you carry out your due diligence so that when you've identified the right investment opportunity, you can grab it right away. So there you have it. This is the system I use to efficiently manage my money. It has served me very well so far. As mentioned earlier, you may not need as many accounts as I do, or perhaps you may need more! Whichever the case, there are four accounts you must surely have. They are the Personal Expenses Account, Credit Card Payment Account, Emergency Fund Account, and the Investment Account. With these four accounts in place, I'm sure you'll do well in managing your money, unless you start losing your discipline. Start implementing the system right away and you'll see the positive effects it'll bring to your financial health.
Cheers~
