Friday, June 5, 2009

Reloaded & back to basics - Money Management basics

What's been happening
I've been tied-up awhile due to job commitment + searching, learning & planning my next 10 year's of goals, financial & otherwise.

From hindsight, I found what I've been lacking - a basic template for money management. No, not investment money / risk management or sizing but basic money management in terms of allocating net income.

After finding two books - Secrets of the Millionaire Mind + Crashproof Your Life, trying and testing to live within the basic money management (a personalized version from those two books) and finding that it works... good, I thought I'd share the ideas here with you.

Basic Money Management (Net Income Allocation)
The percentages (%) below are allocations of Net Income for each stage, the left over % for each stage are for necessities. Thus, the trick here is to REDUCE necessities, thereby allowing you to reallocate the %.

Now, here's the double whammy - if you reduce necessities AND increase income (active or passive income), you get a serious turbocharging towards Financial Freedoom, where your passive income (investments) are making enough returns to cover your necessities.

10% Emergency Buffer
* to build an emergency buffer for 3 months' to 12 months' average monthly expenses
>2-4 months in savings or liquid area
>2-4 months in high interest accounts (staggered FDs/CDs, transaction accounts like Hong Leong eBroking, flexi mortgages like Standard Chartered's MortgageOne)
>2-4 months in short-term bonds or bond funds
* once you have enough emergency buffer built, the amount should be allocated (in addition) to your investments (see Intermediate below)

10% Feel Good
* play / fun / hobbies (or hobbits, whichever you prefer)
* reduce debts, especially credit card debts & personal loans
* charity - this includes charity to family, team members and of course charitable organi
* anything that feeds your spirit and inner self

10% Investments
* Asset Allocation
>Bonds, Stocks, REITs / Properties, others (eg. gold, commodities, collectables)
* Diversification within Asset Classes
>Domestic & Foreign
>SmallCap & LargeCap
Heheh - this area was where I was mostly focussed on - thus, an unbalanced approach.

10% Education
* family & self education & continuous learning (ie. books, audio books, seminars, etc.)

10% Accumulation for Specific Future Spending Goal
* eg. Car, House, Mortgage Paydown (suggested minimum additional 2 months' prepayment per year)
* this amount may be accumulated in high interest accounts, bonds, bond funds, even REITs given enough time horizon..

Heheh - see, with such a practise, we can play and have fun WHILE being disciplined in growing our assets. I tells you, it feels good to continuously give to charity (via credit card deduction lar, which have "cash back" ;P).

My monthly net income allocation is as above, all the way to Advance, ie. I'm only using 50% of my net income for necessities. In addition, I'm still taking a cut from gross income to contribute into my EPF (CPF / IRA equivalent). "Windfalls" like bonuses are 90% allocated to Investments & 10% to "Feel Good". Of course returns from investments are re-invested or earmarked for re-investment - bad habits die hard ;P.

Ok ok - my personal monthly allocation are:
10% Emergency Buffer
* 3 months in SCB Mortgage One (aiming for 4 months)
by pre-paying my principle, I don't pay interest on it & I can redraw anytime online or via cheque. hey, no one is going to give me 3.55% pa compounded daily ;P
* 1 month+ in bond fund (aiming for 4 months)
better returns, on average, than SCB's Mortgage One's BLR - 2.2%
* 0 months in REITs (aiming for 4 months)
potentially the best returns BUT most "illiquid" in the sense that liquidation during an emergency need may be at a "wrong market timing".

10% Feel Good
* Charity via credit card autodebit for UNICEF & WWF. FYI, SCB's JustOne Titanium Card gives 2% - 5% "cashback" without any need for balances carried forward monthly (ie. cleared monthly)
* Hobbies, family outings, treating friends & team members

10% Investment
* Dollar + Value Cost Averaging for foreign focussed funds
Public Mutual's Public Far East Select Fund (PFES) & Public Regional Sector Fund (PRSF)
DY >=8% & ROE >=10% & $/NAPS<=80% & D/E <=0.5

10% Education
* $250 pm for SSPN for my little Ariel's education account(she's 3 this year). Maximum tax relief pa is $3,000 only, thus the limiter of $250 pm
* $100 pm for Ariel's interest classes
* a set amount for REITs to generate $1,000 pa for my personal books in the future
* the rest for personal books & continuous learning

10% Accumulation for Specific Future Spending
* SCB Mortgage One 4 months prepayments each year
* Holidays
* Notebook replacement

I'm aiming to reduce my necessities from the current 50% of net income, to 40%-45%, thereby allowing me to increase allocation to "Feel Good" & "Investments" by 5% each. Call me crazy - I want to leave behind something significant for my little Ariel, UNICEF & WWF when I'm gone. Gambate!!!

Phew... and recently my boss gave my colleagues and I bonuses - yay!!! Thank you boss!
The 10% from this windfall is funding my holidays in China and the 90% is being used to boost my emergency buffer and investment in REITs - just got another position in TWRREIT, but that's for another day's blog ;P