5 Ways to start your journey in Personal Finance!

Your personal finance starts with you. So for my very first post here on #5minswithmack, I will be sharing 5 ways to get you started on your journey towards your personal finance and financial planning in general.

1) Divide up your Income

First up is to know all the numbers around you, know your cash flow, know your income, know what you spend on every month, identify your needs and divide up your income into these 3 categories.

• Expenses - The needs in life that is essential for survival (E.g. Utility bills, phone bills, allowances, groceries, insurance premiums)

• Wealth - Wealth can be spent on the wants that are not necessarily essential in your life as well as for investing and for your retirement planning (E.g. Shopping, investments, saving up for a big-ticket item, retirement planning)

• Savings - Money you should put aside for unforeseen circumstances (More on point 2) (E.g. Emergency Fund, debt repayment)

One common allocation of your income is to follow the 50-30-20 rule:

50% Expenses, 30% Wealth, 20% Savings

BUT, It's important to know your needs in life as the percentage varies and changes at different stages of life.

"Pay yourself first before paying for anything else!"

2) Set aside an 'Emergency Fund'

I remember back in primary school, I'll always have this $10 kept inside a hidden compartment of my wallet that I'll only use it during emergencies (Not sure what I actually spent it on as my idea of emergency then could be literally anything)

An emergency fund works exactly the same but now that you're in the working world and earning a fixed salary, your salary is a good indication of how much fund you should have ready in case of an emergency. A good start will be to save an emergency fund that is 3-6 months of your monthly salary, and if you are self-employed like me, saving up 6-12 months for an emergency fund is necessary due to the uncertain nature of our work.

An emergency fund can tide you through a period of time when an unforeseen event happens. One example is when you lose your job, which results in a loss of income, this will then trigger the use of your emergency fund so as to tide you through a period of time while you look for a new job.

The fund can subsequently be replenished when you start a new job! Other forms of emergency will be medical expenses and urgent vehicle repairs etc. (Not that branded bag you've been eyeing on for a month)

An emergency fund should be liquid and not an investment. You should instead choose to keep it in a high-interest bank account, so you can have access to it right away when an emergency strikes (Personally I have a Standard Chartered Jumpstart account, which earns me 2% interest p.a on deposit balance up to $20000!)

"To be prepared is half the victory"

3) Insurance Protection

No one likes to talk about insurance, I get it. But insurance is important, and everyone knows that. Insurance if done and planned right, can be inexpensive and useful for you in the long run. When you're building wealth, you need something to protect you from the downside that could potentially jeopardise your wealth accumulation. And nothing in this world will pay you in the event of adversity, except insurance.

I cannot emphasize the importance of getting some form of insurance protection when you're young. Not only are you most probably at the pink of health (Good health buys certain insurance, if you have wealth but not health, you can forget about it), but also, premiums are much lower as compared to when you choose to get it at a much later age. If you have done your cash flow, it is a good indicator to help you know how much insurance coverage is enough. This is a post for another day on how to know if you're paying too much for your insurance

So, start digging out all your insurance documents, ask your parents what have they signed you up for, tabulate it or work with someone who is equipped with the knowledge to help you so, like me, to at least give yourself the clarity you deserve and know if any changes need to be done.

"When the praying does no good, Insurance does help"

4) Diversify your investments

'Diversification' is a common term used in the finance world, and is a technique and strategy to reduce risk by allocating investments among various financial instruments, industries, and other categories. Maximizing potential returns and reducing losses by investing in different areas that would react differently in the same market event.

So, rather than putting all your money into one very good investment that can grow quickly exponentially but also has a risk of crashing, try investing in a few good stock that is doing well and should one of them crash, at least you have the other investment to cushion the loss and minimise your overall losses in the market.

If you're looking to start investing, consider Robo-advisors! Robo-advisors are digital advisory services that basically replace the human investment manager if you invest via financial institutions.

Robo-advisors allow you to invest passively in the long-term and help you automate your international investments at a lower risk. Most Robo-advisors deal with ETFs (Exchange-traded funds) from the US or worldwide. ETFs are a type of fund that owns assets such as stocks, bonds or commodities.

Robo-advisors are especially cost-effective for people who are new to the investing game and one can start investing from as low as $100 each month! If you're looking for a Robo-advisor, check out Stashaway or Syfe for a start!

"Don't put all your eggs in one basket"

5) Track your expenses

Perhaps the fifth and last step sounds the stupidest, but no doubt just as important as the rest. You will be surprised at just how many people fail to track their expenses.

Here are 3 things you can do to better track your expenses

1. Know your spending 'pitfalls' & be more conscious of your spending habits (Cut down on your bubble tea consumption, your wallet will thank you and so will your health!)

2. Reduce the habit of spending impulsively (Before you buy something, give yourself a feel days to evaluate if you really need to buy that certain item)

3. Eliminate unnecessary expense that you might not even be aware of (Cancelling that certain online service subscription you don't even use but is being charged monthly for)

There is a wide range of expense tracking apps out there to get you started on tracking your own expenses. So make use of them and start actively tracking your expense so you can start to save more for your own benefit!

"Beware of little expenses, a small leak will sink a great ship"

My thoughts

To me, there is no fixed way to learn about Personal Finance, as each individual is different, we all have different spending habits, we are all at different stages of life with different sets of needs.

But, start by listing down all the numbers you already have, and calculate your cash flow. Only from there can you start to plan and execute a financial plan that you can follow that is realistic and measurable. Make use of the many tools available to you out there, I am a tool myself if you need any advice in regards to your personal finance!

So, what are you waiting for? Since we are all stuck at home due to Circuit Breaker, why not make full use of your time to start your planning for your own personal finance!

Stop procrastinating and start planning!