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Showing posts with label Art of Saving. Show all posts
Showing posts with label Art of Saving. Show all posts

The Rule of Thumb on Savings

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Jake

'Overspending on cars now could lead to having walk in retirement' - Gaurav Ghose

Wealth management books, articles, trainings, and forums offer the same general idea on savings and income protection but slightly differ on how much they should be setting aside per investment basket. I also tried to play around on which percentage allocation will I be able to prepare for my future financial obligations.

Before we proceed on the percentage allocation, let us know the different Investment baskets we need to consider. This is best explained using Colayco's illustration of Investment Baskets:

  1. Protection Basket
    • Emergency Fund – 3-6 months worth of personal expense
    • Life Insurance
    • Medical Insurance
  2. Life Goal Basket
    • Children's Education
    • House
    • Car
    • Etc.
  3. Retirement Basket
    • Day-to-day expenses
    • Medical Expenses
The percentage allocation that is common within these reference materials is the Ten Percent Rule. i.e. 10% on Protection, 10% of Life Goals, and 10% on retirement, leaving behind 70% for expenses.

But this doesn't seem to apply in reality, considering that expenses are varying due to Life Goals i.e. family. On top of that, there is inflation and interest rate you are using for your investment. In short, you need to vary your percentage allocation per age to fit your financial objective while maintain a relatively good lifestyle.

I referenced these from an article Dubai, written by Gaurav Ghose. His article states that you need to increase your fund allocation for your retirement as you near your retirement age.

Let us consider our Average Joe:
  • Have a stable job
  • Desires to have a family with two kids
  • Desires to have a car and house of his own
  • Would like to retire at age 60
Age
Protection
Life Goals
*Retirement
**Expenses
25-30
10%
10%
10%
70%
30-40
10%
20%
10%
60%
40-50
10%
20%
20%
50%
50-60
10%
10%
30%
50%

Age 25-30: Average Joe is still single and may have a few dependencies at hand. i.e. parents or siblings

Age 30-40: Common age to start a family. If you start to have kids at this age, your life goal baskets or expenses might increase as well, but DON'T NEGLECT your protection basket especially if you have more dependencies already.

Age 40-50: This is usually the time wherein people plan to have a house or car of their own. However, this is also a crucial stage wherein they need to increase their percentage allocation for their retirement.

Age 50-60: More often than not, children are already working at this age. To retire comfortably at age 60, they need to 'pump-up' further their retirement fund.

*Retirement fund should be invested in an instrument earning an average of 10% p.a.

**Average inflation rate is at 5.5% p.a.

In a nutshell, you must be flexible on allocating your funds depending on your personal and family needs, but don't leave any of these investment baskets empty. Don't overspend and invest for your future.
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The Budget App der

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Jake


It was twelve months ago that I started managing my finance by having my own budget. The first application I used was actually an excel file forwarded to me by one of my officemates. I used it regularly and tracked my expenses religiously. The only problem was it takes a lot of effort to input the values and track the expenses. Also, it doesn't have any form of feedback on how far I am on the budget that I was able to set.

On April 2011, I started to look into Apps on mobile devices that would help me manage my finance with ease and provide me real-time report and trend on my overall finance. On my experience on budgeting, my criteria are as follows:



  • Able to set budget represented by different criteria
  • Should contain data for income and expense
  • Track reoccurring expenses
  • Monthly report for income vs. expense.
  • Should be able to tell you how far are you from your budget: Budgeted vs. Actual
  • Can be exported to excel
  • Graphs like pie chart, bar and line graphs to show trends in my finance
  • User friendly
So far, with all the available apps offered in the market, one app fits the criteria I made: Budgets for iPad by iBear LLC


http://ibearsoft.com/budgets/

What makes this app so cool is the interface (and the graphics). Because of the real-time update and report on my finance, I was able to make sound decisions over my expenses.

BTW, did I tell you it was free? Yes, its free. And the advertisement on the app is not that annoying when you are using the application.

I have been using it for almost 6 months, and because of this app, I have better control over my expenses.

TRY IT!!!

Unfortanately it doesn't have a counterpart for android. However, they were able to release a better application that has more features than Budgets. It is called "Money", also developed by iBear LLC, and available for android OS.

http://ibearsoft.com/money/

I haven't tried this app but I am very curious to explore it. Two cool things about it is the Bills and Calendar features.
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The ideal way to save money

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Jake





There are three types of people on their methods of saving money.


  1. Income - Expense = Savings
    This type of saver tends to spend his or her income first for expenses, and whatever it is left, will be considered savings. Most people failed to save in this process due to their perception that they are spending money below their income. This clearly shows that the person does not keep track on his/her expenses and only relies on what is left on their ATM savings account. We usually termed this as a "Luck" Saver.

    i.e. At the beginning of the month, the person receives an income of 20,000. Since the person relies on perception when spending, he never realized that he/she has spent 19,950 pesos at the end of the month. Before the 2nd months income, he/she was able to save only 50 pesos.
  2. Expense - Income = Savings
    These are the people who haven't received their income, but already have their expenses lined-up. These are the people who were able to accumulate bad debts from loans or credit-cards. They subjected themselves to spending spree and totally OUT-OF-CONTROL.

    i.e. At the beginning of the month, the person has accumulated already 10,000 peso worth of credit-card expense. When his/her 20,000 pesos income came, the person is already limited to budget his/her remaining 10,000 pesos to a whole month. If this habit will continue, he/she will remain on bad-debt.
  3. Income - Savings = Expenses
    This is the most ideal way to save money and accumulate wealth. The moment your income is provided, set aside a portion of that money for you savings basket. The remaining money will be used for your expenses. In this way, you will be disciplined to limit your expenses and not to extend your savings. With this method you will be able to set your expenses and savings fixed.

    i.e. When the person received his/her 20,000 peso income, 10% has already been set-aside for his/her savings. The person is now free to spend the remaining 90% on anything he wants. He/she will be able to accumulate 24,000 pesos at the end of the year if he/she continue to do this type of discipline for 12 months.
So what kind of a "Saver" are you?
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