How to Manage your Finances

Money management is the process of knowing where you have been spending your money, and having a well thought-out plan for where you would want to place your finances in the future. To be able to manage your finances, you would have to have the following in mind:

1. Setting Your Goals
2. Get Organized
3. Cut on Splurging
4. Build a Personal Budget
5. Save Money

Setting Your Goals

Setting financial goals is an exciting process. This is your opportunity to decide what you truly want to do with your money, and setting out to achieve those goals. Financial goals have to be very specific rather than vague. Before you start to save, determine exactly what you want, when you want it, and how much it will cost. There are three basic goal types: short-term (achievable in under a year), mid-term (achievable in two to five years), and long-term (achievable in five-plus years). You could also set your own terms and a dateline, the most important thing to remember is to achieve your goal. If you have multiple goals, you may choose to work toward them all at once, or concentrate on one and then move to the next.

When saving for goals, be flexible. If you simply can’t manage to put away the amount you thought you could, don’t give up. Consider extending the goal achievement date, reducing the goal amount, or increasing your income so you can save more.

Get Organized

Having all your information and paperwork in order and easily accessible is the key to efficient management. You would also not have to waste any time searching for all your investment documentations, account balances, bill payments and other important financial documentations.

Designate a personal work space
Set up a safe and private area in your home where you can conduct all of your personal financial arrangements. This is where you will be keeping all your documents such as bills (paid and pending payment), shopping receipts, and tax records. If you have a computer, a logical workspace will be close by, particularly if you will be using a particular software designed to help you with your money management.

Have the right home tools to get started
You can organize your personal finances with just a few home office tools:
* Filing cabinet – This is to file all your receipts, rebate information, warranties, paid bills, and recent account statements so you can access them easier. Review the contents of your cabinet regularly. Keep checking, savings, credit card and brokerage account statements for seven years. Discard old documents and store the ones you need.

* Shredder – To guard against identity theft, invest in a shredder (preferably one with a “cross cut” feature, where instead of slicing the paper into strips, it cuts at various angles). Use it to destroy all unnecessary personal and financial documents before you discard them. Shred paperwork that lists your account numbers, passwords and PINs, personal contact and identity information (especially your Social Security Number). Specific items to shred and discard include:

• ATM receipts
• All account statements
• Canceled and voided checks
• Credit reports
• Expired passports and visas
• Pre-approved credit card applications

Simplify your personal finances
The more paperwork you have, the harder it is to keep track of your finances. Therefore, a great way to simplify your system is to sign up online, automatic bill payments (available for free at most financial institutions). With it you’ll be able to view statements and pay bills via the Internet. It cuts down on mailed bills that can get lost under a shuffle of paperwork, and can prevent late payments, help you avoid penalty fees, and keep your credit history positive. You would also be able to view your transaction history online.

Monitor your accounts
If you have an account – a current account, savings account, etc. you would have to monitor your account activity carefully. You should always know your correct account balance, if cheques are outstanding, and when any automatic payments which were made online were done and if it was cleared. This way you will never overdraw your account and be charged insufficient funds fees.

Cut on Splurging

“Splurging” is spending money on things you don’t really care about or need, simply because you are not paying attention to your shopping habits. You can increase savings by identifying where waste lives in your budget and taking steps to eliminate it.

Track spending behaviors
Track your spending for at least one month. This is a very important and it would reveal a lot about your spending tread. Only after you know where your money has been going can you begin to redirect it to where you truly want it to go. When you begin tracking, accurate figures are important. To help your worksheet reflect where you are really spending your money, you could use a couple of the following techniques:

• Write things down – Carry a small notebook and record every purchase you make. Jot down the date, item, and cost. Total each day’s spending.
• Keep receipts – Keep all purchase receipts and tally them at the end of the day.
• Monitor ATM use – Become conscious of how frequently you visit the ATM, and how much you take out before you have to go again. Be sure to write down what you are spending the cash on as well.

Examine your findings
After you have tracked your spending for a minimum of four weeks, examine your findings. If you are like most people, you’ll be able to identify areas of spending waste fairly quickly. When you build your budget, you’ll be using the results of your tracking work to make sensible and reasonable changes in your spending behavior.

When looking at the numbers, begin to sort out your “wants” from your “needs.” Expenses that you can’t live without – food, home, transportation, and utilities – should always take priority over such discretionary expenses as gifts, gadgets, and entertainment.

Build a Personal Budget

Do not be intimidated or put off by the word “budget.” It is nothing more than a plan for what you want to do with your money. A well-designed budget does not restrain you but it allows you to make the most of every penny you earn and will keep you on track with your goals in mind. Though everybody’s budget is different, there is one consistent rule: expenses should never exceed income.

List and total your monthly net income
Begin with your income, as it will determine what you can afford to spend and save each month. Total up every net (already taxed) ringgit you make in a month. Avoid overestimating your income. It’s better to have money left over than be caught not being able to pay your bills.

Identify where you want to make budgetary changes
Once you have an accurate idea of where all of your money is going today, it is time to make changes for the future – particularly if there is more going out then is coming in. Your options include increasing your income, decreasing your expenses, or a combination of the two. Consider each expense carefully (remember those wants and needs?), actively decide where you want your hard earn savings to go.

Example: Your lunches out may be costing you RM200 per month – a figure you are not happy with. Realistically thinking, you could bring food from home at least half the time so you could reduce the expense by RM100 and adjust the figure.

Don’t forget debt
If you have credit card balances or unsecured consumer loans, include those payments into your budget as well. Figure out the amount you can realistically pay each month, and commit to never going under that amount. Since interest rates for this type of debt are often very high, it makes sense to pay it off as quickly as possible or on time.

Beat the budget busters
Sticking to your budget can sometimes be a challenge. Use these tools and techniques to help:

• Avoid those stores, shopping malls, café and entertainments where you know you have a hard time controlling spending.
• Write a list of what you need before shopping, and buy only what’s on it.
• If you’re on the verge of splurging, seek the support of a friend who knows what you are trying to accomplish.
• Charge purchases on your Credit Card only when you can afford to repay the balance in full by the due date.
• Question each potential purchase to know if it is a want (nonessential) or a need (essential). Recognizing the difference between the two can help you avoid unnecessary spending and impulse shopping.
• Revisit your goals. By sacrificing those things you don’t really need today, you can attain your more meaningful financial objectives in the future.

Save Money

Setting aside cash on a regular basis is a habit worth getting into also something we were taught since we were kids. While saving money may at first seem difficult or even impossible, in most cases all it takes is a commitment to the process and adopting an efficient savings system.

How much should you save?
An excellent goal is to save ten percent of your monthly net income. Therefore if you make RM2,500, ideally you would put RM250 into a savings account(or more if capable). Of course, not everyone can set aside that percentage, so if money is tight, begin with whatever you can afford, even if it’s only a few ringgit.

Make saving easy
There are many proven techniques to jump-start saving:

• Use automatic online transfers from your checking to your share and passbook savings accounts. What you don’t see you don’t miss.
• Save all or a portion of each raise or bonus you receive.
• Deposit bonuses, income tax refunds, and cash gifts from birthdays, holidays, or other special occasions into your savings.
• Save all of your loose change. Ten cents here and fifty cents there will add up.
• Once you’ve paid off your car or other installment obligation, start putting the same amount into savings.
• Save even if you have debt. If your debt carries a high rate of interest, it is to your financial benefit to concentrate on repayment. Find a sensible balance. By saving even a little as you are repaying debt, you’ll start an emergency account, kick the habit of borrowing, and establish a savings routine.

Establish an emergency fund
An emergency fund is an important part of any savings plan. Having six to twelve months worth of essential living expenses set aside will guard your finances against unexpected job loss, medical problems, and high expenses. Good places to keep your emergency fund include:

• Share and passbook savings – Traditional share and savings accounts are insured and will allow you to withdraw funds penalty-free at any time. In exchange for total liquidity and stability, these accounts provide very low investment returns.
• Money market mutual fund – While not insured, the investments in money market mutual funds are low-risk. They provide immediate access to funds without early-withdrawal penalties, and typically offer higher rates of return than passbook savings and money market deposit accounts.
• Fixed Deposit – You can invest a lump sum for a fixed term at a fixed interest rate. You can earn preferential interest rates for fixed deposits invested for one year or longer.
  • Investment terms from 1 to 60 months
  • Interest can be paid monthly, quarterly, half-yearly or on maturity
  • The interest rate remains unchanged for the investment period
  • No withdrawals or deposits are allowed