Keep It Simple

The personal finance world is a giant conglomerate. There is no single way of correctly or appropriately managing one’s finances; this aspect adds much flavor to cultivating your own method. However, keeping it simple lets you practice the process repeatedly and eventually painlessly. Today, we share several succinct aspects of personal finance and hope you will benefit from it.

  • Organizing Financial Goals- Your Game Plan.

Financial discussions often recommend saving at least 20% of your gross annual income. This is often interpreted as general savings. In fact, this savings rate represents intended savings for retirement when earned income is expected to cease or diminish significantly. One may want to classify savings into categories according to his/her future goals. This could be saved for a car, home, wedding, childbirth, medical expenses or retirement savings. Each goal represents a discrete need and according to the time frame when the monies will be needed. As saving goals are met, in time, one needs to re-allocate savings to new goals or increase contribution towards existing ones. Priority-based savings for each goal enables you to visualize the appropriateness of your plan and make changes as needed.

Furthermore, accurate characterization of savings enables one to realize that initial savings amount may seem larger but it gets diluted once small quantities of contribution are allocated to each saving goal.

 

An example of classifying savings goals.

 

  • Earn More. Save More.

From the above figure, we can quickly realize that savings of 20% of your net annual savings will not be sufficient to meet your financial requirement. In fact, 20% of annual income needs to be saved just for retirement! Additional savings are particularly challenging because they need to be saved on a post-tax basis (tax-free and tax-deferred options exist for retirement and healthcare expense related savings). Therefore, a strategy of increasing one’s earning potential while minimizing tax consequences will quickly and effectively increase the net saving amount. Increasing your income by additional work hours at existing employment, picking up odd hours (late evenings, nights or weekends/long weekends/Holidays) usually pays a higher amount and one can build additional savings rather quickly. Alternatively, one may opt for a second employment or even a separate business opportunity (commonly referred as a side-gig). Having a working spouse or employing your children into your business increases your tax efficiency while keeping a larger chunk of your gross income for fulfilling your goals.

A Sample Distribution of Saving Allocation.

  • Spend Judiciously (not less!)

Saving money is often related to not spending it. Yes, spending and savings are inversely related. But, judicious spending leads to more satisfactory life than spending hours trying to save a small amount of money. In order to determine spending habits, one needs to jot down yearly, monthly and daily spending habits and assess what monthly or yearly subscriptions are being paid. Year-end summary offered by Credit Card companies are often very helpful in this endeavor. This detail should be then put in a table format and be analyzed. Once this is done, it will be apparent that there are some elements where excessive monies are being spent and a consideration to eliminate such costs can be made.

  • Organize Your Financial Diary

Use a simple table format to jot down your monthly income/yearly bonus and expenses. Keep the third column for tax-deductible expenses such as home mortgage interest deduction, childcare, job-related expenses and the real estate tax deduction. The fourth column should be kept for notes. You can find such a format here.

Organized, Financially Savy and Therefore Peacefully Asleep!

  • Periodic Assessment of Your Financial Health

Make every effort to realize upcoming expenses and allow enough cushions in your savings to absorb its impact. Your income and expenses may be evaluated on monthly or at least quarterly basis. Why? Because it is your business! This practice may not eliminate unforeseen expenses but at least allows you to better prepare for one.

 

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