Saving Money Little By Little

What is Rule of Ten?

Rule of Ten is a plan to make a saving at least 10 percent of your money. Why 10%? It’s small enough for you can manage the “missing money”, but it’s big enough to make significant amount.

For example: if you have a salary of $1500 per fortnight, you need to save at least $150 for that paid period.  What you can get after a year (26 fortnights) will be just under $4000! And managing $150 per fortnight or $75 per week from your budget should be not that challanging if you willing to try the tip below.

Maximize your chance!

To get the best out of this technique, so some of the tips below and you will maximise your chance of success

1. Open a new account separately from your “normal account”.
   “If you cannot see it you will not use it” is the main purpose here. Your saving account should not directly and easily viewable by you. Open a dedicated saving account (maybe those no-fee “online” saving account) that should not be linked to your day to day internet banking or ATM.
2. Pay yourself first.
   Transfer that saving amount (10%) first thing before even touch the money from everything else. Better yet, setup on your internet banking a direct recurring payment scheduled to transfer the amount from your day to day account where  you receive the salary in, to that special “saving” account. Place the date 1 day after the usual day of payment. For example: if your salary always come at Thursday, then setup the transfer to be done by Friday . (Not less, as the crew probably were not ready.
3. Do not over-commit the amount.
   If you can afford to save more than 10%, that’s great.. but you need to do this continuously and should not overburden yourself. The problem if you commit too much is that at one day you will stop and start using the money and it defeats the purpose of the saving. Actually if you really tight, start with 5%. Better smaller but consistent rather than too big but you cannot commit.
4. Separate this “saving account” with other account such mortgage offset account.
   The idea is, if you have extra money, put that extra into mortgage offset account to help you reduce the amount of interest paid every moneth. But of course if you need more money to cover expense you can always get it from this offset account. The reason to separate this “saving” account is that the amount of this saving is never to be touched unless really emergency or  until you achieved the goal.
5. Dont put this saving into term deposit.
   Having some extra money on the bank earning no or little interest will tickle you to put it on the term deposit instead. But this again defeat the purpose. This saving money is supposed to be your emergency fund that you use on rainy day. A simple visit to the bank or ATM card should be all you need to access the money. If you put it on the term deposit, then you will need to wait until the maturiry date to access the money without penalty.

What next?

The first goal of this exercise is to give you the level of Financial Protection first. That is to have in that saving account the amount of money enough for you to live without working for 6 months. Of course the amount will be different from person to person who live in different city/country. Do your budget and determine the amount.

Once the first goal is achieved you can start allocate the extra money to top up your investing account. The investment account can be as simple as term deposit, or account for buying share/stock or other investing purposes. Don’t stop what really already started (regular saving), but from time to time if you calculate that you have more than 6 months worth of living cost money (remember to make sure you incorporate any increased of living cost), then transfer the extra amount to your investment account.

In general, if you have other measures in place (income protection insurance, life insurance, etc) you don’t really need more than 6 months. But of course you can just decide to make the goal changed to have 12 months worth of financial protection instead.

Happy Saving !

Related Posts

• Offset Account, Tax and High Rate Term Deposit/Saving Interest
• For the Savvy, There is No Junk Mail ?
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• A Sweet Revenge: Let The Banks Pay Your Debt
• Income Protection: Your Salary Cover In Need

“Junk Mail” Business

"Junk Mail"

Or should I say “local advertising delivery company” is actually quite useful for local economy. Imagine that if you are a small business and just open a barber shop in your local area. How do you marketing your new shop ? Yes, you might advertise it in local newspaper/community publication (good alternative) or even radio (broader range) or yellow pages, but nothing more powerful with “direct marketing” to customer. Your promotional material in potential customer’s mailbox, with very affordable cost and fast delivery.

The profit margin is also not that bad as the company just pay about $30 for every 1000 fliers delivered. And probably it’s not very difficult to recruit people to walk around for 2 hours weekly for some extra cash while exercising. So, bottom line, unless the government make it as illegal activities, those “junk mail” will not be stopped or reduced anytime soon.

The promotion

Of course, the main (and only) purpose of such flyer is to promote the business (and its product) and we as the potential customer is being the target. Now, instead of being a victim, how actually we can make use of this flyer to our own advantage and to make financial gain on your side ?

For a start, let’s find some marketing material from similar industry. For example: catalog of medicine from 2 different chemist, list of grocery product from 2 different supermarket, or even menu card from 2 different Thai restaurant!

all the bargain prices here

Groceries are one that everybody will buy continuously, so let’s focus on this. By using the “junk mail”/price catalog, note all the items that usually you buy(or want to buy) on your note (just get separate A4 paper sheet or special “grocery” notebook if you want) together with its price. If you have this “weekly special” from 2 different supermarkets – in Australia usually from Woolworth and Coles – then you will also find that almost never you will see identical item are on the catalog. (This probably need to be investigated further by ACCC as this anti-competitive behaviour is obviously not coincident and could indicate some price coordination at higher level of the marketing – at least city wide or regional)

Then bring your note when you go shopping as usual. But this time compare the price of your usual shop with the one on your note (if the item is there). Then if you are shopping in the big mall, then you can take your time to go to the other shop to buy the item with cheaper price. Of course this is a bit of hassle/inconvenience and you will think that the saving probably is not really significant. Well, try to buy bulk…. 30 cents different if you buy 10, it becomes $3. Do this every week you will save $150 a year. Not that trivial isn’t it ?

One Warning: as with seeing other catalog, please control yourself and stick with the one that you really need. Do not let the impulse buying cloud your judgment. It easier said than done, but you should try it.

Keep and maintain your notebook and do the same next week. Sooner or later you can do direct comparison of the prices and you will know immediately if a price is really a bargain or just a little bit trick from the supermarket. You can actually do the same with the medicines or other product with similar method.

Is it worth it ?

That depends on individual. If you are super busy and your time is more valuable than anything, then additional 1 hour of shopping to make $5 saving probably is not really worth it. But if you do the shopping as part as your weekly “entertainment”, probably 1 hour longer shopping is not a big deal. The main point is you gotta know your own priority and condition. If adding one hour of shopping means you loss opportunity to earn bigger money, then it’s not really worth it as well. But doing the saving by also educating your 7 years old, probably something valuable that you can do – and SAVE some money while doing it!

Hope this gives you a bit of idea on optimizing your day to day cost of living. But don’t over do it…

Related Posts

• Offset Account, Tax and High Rate Term Deposit/Saving Interest
• Rule of Ten: The Least You Can Do
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch

Mortgage is Long Term Commitment

The mortgage or homeloan is a contract to repay the debt for long term period, usually 25 years or 30 years. So, any change that you introduce in order to get the mortgage, have to be able to sustain for the duration of the mortgage. For example: if you dine out every weekend with your family, because of the mortgage, maybe you can reduce it to twice a month. But if you plan to have no more dine out just to fulfill your mortgage, you will be in trouble sooner than later.

You Need to Keep On Living, and Living Comfortably

Don't change Lifestyle Dramatically

Taking a mortgage to own your home is a first step toward better future, not the final one. Hence, you need to keep on living and still maintain your (better) living quality.  You need to maintain your quality of your living before and after taking mortgage, for example: if you eat certain brand of food, you need to be able to buy the same brand, not the cheaper with lower quality one. If you usually buy some luxurious item, maybe you can reduce the frequency, but you will still need to be able to buy that luxurious item from time to time.

The Economy Will Change Up and Down

Also, the economy will change as you go. It will go up and down, and so does the interest rate of your mortgage. Unless you are on 30 years fixed interest rate, you need to be able to serve the mortgage at least if the interest rate increase by 1% for practical guide.

For example: If you took $400k mortgage for 30years with 5% interest rate, you will be paying $2,148 monthly. If it were 6%, you will be paying $2,399.  So, it is a good practice that you need to be comfortable should you need to pay that much. At the end of the month if there is no rate increase, then you can spend the money, or better action: pay it to the mortgage as your extra repayment. Every time interest rate actually increases, you then need to re-assess your situation and be prepare to pay further 1% hike. You can use repayment calculator available online to help with the calculation, such this calculator.

The Valuation From The Bank Could Be Lower

Before the bank or any lender give you the final offer for the mortgage, they will need to do the valuation of the property that you will mortgaged. Usually the property you buy and the property that will be mortgaged (put as security of the loan) are the same property. In this case, you need to be ready if the bank give you lower valuation.

For example: with $50,000 deposit, your mortgage broker say you can borrow up to $400,000. (Total value $450,000 with LVR – Loan to Value Ratio – 88% ). Now if the valuation from the bank come up lower, say only $425,000. Then maintaining the same ratio of 88% , the bank will only lend you $374,000. With your deposit of $50k, then total money that you have will be only $424k, or short of 26$k from the selling price of $450k. If you have signed the sale contract, you need to come up with this $26k somehow or negotiate the price with seller (almost impossible as you have signed the contract). So, it’s wise not go for the maximum… give a bit of room just in case the valuation go lower.

Your Situation Could Change

You also need to be prepare if your situation change: newborn baby, job change, salary cut, emergency spending, etc. That’s why you need to achieve the financial protection level, preferably before taking the mortgage. Financial protection is where you have at least 6 months of your living cost on your saving as emergency fund.

What You Need To Do

I would suggest you do this before you finalize your purchase of the property:

1. Calculate your maximum monthly budget for the mortgage without changing your lifestyle dramatically.
2. Reduce this budget for taking a life insurance and/or income protection insurance
3. Use the repayment calculator, simulate if the interest rate is 1% higher than the current interest rate that you have been offered. Get the maximum that you can borrow here.
4. Add no (3) above with the deposit that you want to put. This will be the maximum price of property that you will buy. If you want to buy slightly more expensive property, you just need to add your deposit.

Final Words

Always remember, that taking a mortgage to own your own home is essentially a big step forward toward better future. Yes, to make it happen you might need to do some sacrifices, but that sacrifices cannot be too much different. Otherwise, not only the mortgage become a burden and source of all kind of problem, you will be pressured financially as well if something change. Have youself a bit of buffer, do not push your borrowing capacity and maintain the quality of your living (improve it will be better!).

Hope this helps !

Related Posts

• Offset Account: A Must Have For Your Mortgage
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Getting Your First Home Loan or Mortgage: Not That Hard!
• Why You Should Always Use Mortgage Broker For Your Homeloan
• Mortgage: Change To Fixed Rate or Keep It Variable ?

How It Works

When you take the insurance, you will need to provide a proof of your salary. Then based on the profile of the job and the industry the insurance company will give you a quote of how much you need to pay the monthly / yearly premium to obtain this protection. For example: you earn $3000 per month as programmer then you probably quoted $50 monthly as premium.

Please note that the payout that you will received when you lodge a claim will not 100% of the salary but some high percentage of it (usually up to 80% or 90% depends on the provider). Of course this is designed so that you will prefer to continue to work rather than not working and receive lower pay.

Waiting Period

Protect Your Income

There is one most important parameter when you take this insurance: the waiting period. The waiting period is a time between the lodging of the claim and the start of the payment. Usually you can select this from 1 month to several years. If you choose 3 months waiting period for example, once you lodge your claim, the insurance company will only pay you after 3 months later. The longer the waiting period, the cheaper the premium. So, if you choose 1 month waiting period, you will pay the most expensive rate compare to 2 years waiting period or longer which will be significantly cheaper.

Why people want different waiting period ? Actually, it’s all up to you in consideration of your own financial situation (emergency cash available, etc) and the current budget. If you have some financial protection and can continue live without support for several months, then you can choose longer waiting period that reward you with cheaper premium.

Expiry Date

The second important parameter is the expiry date. Some insurance will provide you with the salary replacement payout only for the first 2 years of the claim. Other can provide the protection until you reach the age of 65 years old. Of course, the one only give you 2 years protection will be much cheaper than the one provide you up to 65 years old in term premium that you need to pay.

Which One to Choose

As life insurance, income protection insurance is also a product that you buy but you wish you will never need to use it. But when you do need it, you want to make sure it give you the full benefit. So, in my opinion, you need to cover yourself up to 65 years old or more if the offer exist and get the shortest waiting period possible. But what is the cheapest way to save on insurance.

Here is what I find the most economical that give you maximum benefit:

• Get income protection insurance from your Superannuation ( IRA / 401k / other pension plan fund). Usually the income protection available is only limited to 2 years expiry date. Choose the smallest waiting period, say 1 month. In Australia, most superannuation fund will offer this , check your local agent. By using this benefit, actually you don’t have to pay anyting extra as the premium will be debited directly from your fund. The money that you probably cannot touch until 65 years now give you immediate direct advantage. Of course if you want to maintain this fund you can always add some extra payment to cover this direct debit.
• Get the second income protection from other company that require 2 years waiting period but can cover you up to 65 years old. Because the waiting period is quite long, you will find yourself only have to pay some significantly cheap premium.
• Tips: do the above combination with your life insurance as well.

So, with this arrangement, for the first 2 years you will get income protection from your superannuation fund with “free” premium, after 2 years to 65 years old you will be cover by the 2nd insurance and you pay very cheap premium for that.

What To do Next

I would recommend you find an insurance broker. Then make appointment to review your situation and  get a quote for your income protection insurance. Wait his/her recommendation, but if they did not recommend the combination above, then explain to him/her that you want it for your maximum benefit. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this important item.

Related Posts

• Protect Your Financial Life: Insure Yourself
• Rule of Ten: The Least You Can Do
• A Sweet Revenge: Let The Banks Pay Your Debt

Insurance Comes To The Rescue

Luckily, the answer of this problem is really simple:buy life insurance. To be exact, a life insurance that also cover disability and trauma cover. We will never know ever, when we are going to be sick or die. Jokingly said, yes, if you die, it’s no longer your problem but it become your love ones’ big burden. But how about if you ‘just’ become disable or need constant (expensive) treatment, not only you will suffer from your medical condition, you will feel the financial suffering as well.

Protect Your Family With Life Insurance

Imagine for one second what will happen if the primary provider of your family suddenly cannot provide that support any more. Not long, your home under mortgage will be seized by the bank as repayment can no longer be made. Then your family will need to rent out. Your surviving partner may need to take multiple jobs to keep the children at the best school  chosen before. Maybe, they don’t even have extra money to cover your funeral and have to fall into further debt that they cannot afford to pay. Well, you don’t want all of these happen to them, don’t you?

The cost of the insurance is relatively very small with the benefit. Think like it’s the price for your peace of mind. So, life insurance premium is something that you need to add to your budget.

Do Not Under Insure

Insurance is one of those things that you buy but you wish you don’t need to use it. So, when you do need to use it, the worst that could happen is that you under insure. The sum of your life insurance should at least covers:

• All mortgage / homeloan, personal loan and credit card debt (Total the maximum limit, not the current usage).
• Living cost for 6 months for your family based on current budget.
• Sum 2 item above, then add 20% for administrative cost and the unexpected (funeral cost, hiring lawyer / conveyancer, etc)

For example: say you have $300k mortgage, $30k car loan, $20k credit card limit ==> Total $350k. Your household budget is $2500 per month ==> 6 month=$15k. Then you need to take a life insurance that pays ($350k+15k)x120%=$438k. (You may round this up to $450k)

So, the idea is when something happen to you, your family/ spouse can immediately pay off all mortgage / debt / credit card and continue to live at least 6 months without you without financial burden. The hope is during that 6 months, your family/spouse can adjust whatever needed to continue/improve their lifestyle now that at least they are debt free.

On the other side of the coin, you don’t want to have the pay out become too big as you will need to pay higher for the premium monthly/yearly.

Where You Get One ?

I would suggest to always get the free and friendly service of insurance broker. Not only they can compare various insurance provider to get the cheapest cost/premium, but also they can help to make the claim, should you needed to claim one, faster. Yes, they will get residual commission as long as you still hold the insurance, but just like homeloan, you will pay this commission money regardless. (It’s not cheaper to go direct to the company, the person who serve you will get the commission anyway, and you did get to compare the market)

Another factor to consider is that the insurance company need to be good enough and to stay around in the market when you need it later. This is quite hard to judge so your insurance broker might have better idea. Remember: get at least quote from 2 different insurance brokers

What To Do Next ?

Go find an insurance broker, make appointment to review your situation and  get a quote for your insurance above. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this very important item.  Remember, if you have a debt, you have to have an insurance.

(Before that, maybe you want to read about another important , but optional, protection for your income: “Income Protection: Your Cover In Need“)

Related Posts

• Income Protection: Your Salary Cover In Need
• Rule of Ten: The Least You Can Do
• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• A Sweet Revenge: Let The Banks Pay Your Debt
• Debt is Good: Only for Investing & Business Though

For example, you’re waiting for the train to come up, in your pocket you got these $2 or so worth of coins that give its noise when you walk. Also it put some additional weight to your wallet. In your mind, you want to get rid of them as soon as possible. And suddenly you realize that you are standing in front of a vending machine with this chocolate bar for sale for $1.20. Don’t you get easy to use that coin to buy this unscheduled item? Probably the answer is yes. First, you already want to get rid of them, then you can make use of a little snack…

Or you can make this coins help your budget of saving….

Quite a Monthly Saving

Here is how I did it. Every time I get a new coins, I refill the parking coins in my car.  But, once I got home,I always empty my pocket from coins and put it all there in the jar. I have a little jar where I use it for coin collection. My wife does the same.

Coins to save

Then whenever the jar is full, I put all the coins into a plastic bag and take them to the bank. Usually they have this coin collector machine which will count all the coins within seconds. And I put the amount into saving account. How much I got? It’s ranging within $30 – $70 per month. Well, not much.. but this amount is direct ly go back to your saving account, not to the vending machine, coffee shop or lottery agent. Doing this continuously, I saw more than $600 a year.

So, that’s a little tip for you today  to make use your changes to the max !

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You can see the same situation with all those instant millionaire who won a lottery of some kind. After few years or even faster, their financial position not only go back to where it was before the winning, but also many found themselves in much worse position.

On the other hand, for those who knows the secrets, even without any increase in their income,  their financial position can be improved significantly: less debt, financial protection, more saving, and improved lifestyle. So, what does it takes to improve your finance position?

Preparation & Planning Are The Secrets

There 3 most important things that you must do as the preparation and framework of improving your financial situation:

1. Budget: You have to have a budget. By having a budget, you know exactly where the money goes, which expense is dragging you, and which cost that can be slashed. If you still don’t have a budget or don’t know how to do it, I suggest to read this article: Effective and Smart Budgeting With No Hassle In 15 minutes!
2. Saving: You have to push your self to have a saving. The amount itself is not important. You can just save maybe $20 per week, but if it become a habit and you got the discipline, it already reach the main purpose. Without saving, you cannot really go anywhere with your finance.
3. Educate yourself to increase your financial education: the fact that you read this article, this is a good start of increasing your financial knowledge. There are abundance of information that freely available on the internet. You just need to know what to search. The most important knowledge will be personal finance (budgeting, managing debt, etc), then you need to learn about investing. For example, you can start with : “Invest! Invest! No wonder they are rich!” portal. After that when you start fiddling with investing, you will realize that know something about how the economy work will be quite beneficial. And if you can afford it, joining a community who have similar goal and mindset (such this) will be a booster for speeding your success.

If you have all three factors above, whenever the break come – whether it’s a salary increase, unexpected inheritance or even lottery winning – you will be ready. You know exactly what to do with that extra money and use it very efficiently toward strengthening your financial position.

Millionaire Mindset

On the bigger picture, while you are trying to improve your financial position. You need to change your mindset. You need to have what I call “Millionaire Mindset“.

What is it? First of all, you need to plan your financial freedom. Your goal is to have such financial wealth that you don’t need to work anymore if you don’t want to. It’s maybe sound too far away now, but that’s how it starts for every single millionaire who achieve their financial freedom. Do not plan that you will be forever working to your company until you retire and then getting pension from government. This is “Pensioner Mindset”. You have to imagine first that one day, since your investment income will be enough to support you, you can fire your boss and do whatever you want in life. You need to dare yourself with this imagination and plan backward to your current situation. Take the first step and you suddenly already on your way toward it.

Then you will take your life as business (in term of your finance). Do not take “no” for an answer because you know you can do it.  See all aspect of your life in different angle as if you are already successful. Although still living within your means.  The mindset is not to say “I can not afford it” but “I want it, and I will make it happen by this, that and this”

And many more items that you can learn to improve your millionaire mindset. This mindset is the one that lead you to your financial freedom.

Good luck with your journey !

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On separate article (Debt Is Bad: Insight From Franklin and Gandhi), I have explained why having a debt is not really a good thing, especially if the debt is used for acquaring any kind of lifestyle product.  So, what is the different now, why suddenly debt become a good thing to have ?

Business and Investment is to Make More Money

The main purpose people doing business or investment is to produce profit.  If it’s not for producing profit, it’s more suitable to call the business or investment a hobby or charity. So, when you’re running a business or doing an investment, you take the money from debt and make it work to make more money. The debt become productive and creating profit. On the contrary, if you take a debt just to buy a plasma TV, then it’s just for your pleasure or pride, you’re not making any more money with that debt. So the debt become consumptive (only for consumption).

Hence, taking debt to do a business is definetely better than taking debt for funding your lifestyle. OK, now the next question you need to ask. But isn’t it better to fund your business within your means ? (No need to take debt?)

Business and Investment Need Leverage To Survive and Keep Making Money

The answer is no, in business and investment, to keep making money, they have to be able to compete with other business or investment. The one with leverage will dominate the market and the losing party have to go out from the market or leverage themselve in order to survive.

For example: since you’re only have $10,000. But you want to do business say opening a restaurant without taking a debt. Well, still can be done. The problem is the guy next door have $100,000 and he wants to open the same kind of restaurant. Providing bot you and that guy have the same skill, who do you think that more likely to survive longer? Of course the one with higher budget. Why? Because they can have more promotion/marketing, hire more staff or better staff, survive longer if the market is not so great, etc, etc…

So, in this example, you can take a business loan and have the same $100,000 as capital. Do you think now you have better chance to beat the competitor?  You bet !

It’s true that having a leverage also means increasing risk and every risk have to be mitigated. But this is another subject matter beyond this article. In short by taking a debt (hence leverage) a business/investment need to take extra effort to take care of the additional risk.

It’s all about ROI (Return of Investment)

At the end all of this business and investment are judged by their return of investment. A business with higher ROI is more successful than the one with lower ROI. By taking a debt, you will maximize your ROI and can expand your business/investment further with the debt.

For example: Say that restaurant on previous example, give you $20,000 income for every $100,000 capital (20% ROI). So the guy next door who has $100,000, then will have $120,000 at the end of the year.

But you, who only have $10,000 (but taking further debt of $90k – and say the interest is $1000 a month) will also have $120,000. Subtract this with $90k loan and $12k interest ($1000 monthly), you will have total $18,000. Your total real ROI is ($18,000/$10,000) x 100% or 180%.

And to show you the importance of leverage: that guy next door can use leverage as well and get his $1,000,000 ($900,000 debt plus $100,000 own money) to leverage his business. Now, your business will be in problem !

The Interest Become Cost of Business

If the interest you pay for personal lifestyle debt is a waste (no added value cost), the interest paid for business/investment is a legit cost of business. Tax Deduction most likely will apply to this interest (check your taxation rule). So, not only the debt can significantly enhanced the business/investment, but the interest paid also receive a benefit.

Conclusion

Taking a debt for business / investment purposes is significantly different compare to taking debt for your personal lifestyle purposes. By taking debt, the business/investment is leveraged to get it’s maximum potential. In fact, this is the driving force of economy, when the business grows, the economy grows. That’s the reason the government will stimulate economy by making it easier and cheaper for business/investment to take business/investment loan.

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Between Franklin, Gandhi and Debt

Benjamin Franklin on his famous quote mention “There are two ways of being happy: We may either diminish our wants or augment our means“. If you have $2000 monthly income, but wants a luxurious lifestyle of $10,000 a month. If don’t do anything about it (augment your means), I can bet that you are not happy. But the other way also true, if you observe some of the people live in the rural village for example, most of them are happy with their life although there is no broadband internet, flashy car, or even electricity. Why ? Because they don’t have to many ‘wants’ (diminish their wants).

“Happiness is when what you think, what you say and what you do are in harmony” This is a famous quote from the great Mahatma Gandhi. It’s so wise that even without any convincing most of us will agree with that saying.

Having a debt on the other hand, is a breach of those 2 principles. If your income is not enough to buy that plasma TV for example. Then that TV maybe can be categorize as outside your means.  But if you then take $3000 debt just to buy that TV, then you’re saying to yourself  “Your income is too low, I pity you. But, I don’t give a damn anymore, I show you how cool to have that TV”. So, you are in conflict with yourself.

In other words, by taking that debt, you are declaring to the world that you are not satisfied with yourself for having such low income that make you cannot afford to buy what you want outright and also that you don’t have enough patience to actually do a saving and wait until the saving is enough. When you’re in conflict with yourself, Gandhi said it will be hard for you to be happy.

So how you do it, then? As you can see, Franklin have shown you the way: you may want to diminish your want (“Actually, I don’t need that TV” and move on) or augment your means (“I’ll find a job that give me double the salary!” or “I will do extra shift 2 times a week and save my cigarette money until it’s enough to buy the TV”)… Not that hard isn’t it ?

So, Why Debt is bad?

1. Psychological aspect as I illustrated above
2. The interest that you pay to lender is a waste – it’s income for the lender but you don’t get any additional value. I mean your repayment will have principal and interest component. The principal pay for the good itself (in this example the TV), but the interest that you will pay for the next 5 years only account for your instant gratification habit, there is no additional value.
3. The false sensation of achievement. For example: after you actually buy that TV in the example above, you might feel proud and feel that you have achieve something. Which is not, you did not achieve anything worthy. You made yourself in worse condition (by having yourself to pay additional expense as the interest) and that’s not an achievement in any standard. The problem is that false sensation is so real and felt by anybody. This is not a good condition because it will lead you to addiction to debt. (Want to feel that false achievement by having more debt)
4. Distance you apart with the good habit of Budgeting – where you actually plan first what you want to buy

The only exception that a debt is not a bad thing is when the debt is used for investing/business purposes. I explain this in detail in this article: “Debt is Good: Only for Investing & Business Though”. Have thorough read to get good understanding. In short, try not to get into debt for getting anykind of lifestyle products.

Hope this helps for understanding debt better !

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Budgeting in 15 minutes

Maybe some of us have confused budgeting with accounting where you need to track and write all your transaction. Which to me, it’s a bit overkill for a house hold to do accounting. (Of course if it’s a business, you don’t have a choice except doing the accounting properly)

So, my opinion is: every household in the world should have a budget.  I recommend to do monthly budget for a year. And also I suggest align it with your tax financial year. I mean if the financial year starts at July, you do your budget from July to June next year. If your financial year start on January, do you budget from January to December time frame,  and so on.

How to Do a  Budget in 15 minutes (each year)

First of all, your budget need to be in written form. You CANNOT just do it on your head. But you don’t need any software, just a piece of paper (well, if you’re fluent with a spreadsheet you can load your Excel or Open Office’s Calc now).  You might need a calculator. Let’s get started:

1. Divide your papers in 12 column to represent every month, add 1 column as your row name
2. Start with INCOME. Estimate your main income per month and put it on every months. Do the same with your partner’s one.
3. Still in INCOME, put all your other income, including your partner’s or children: every single benefit, government support, social security, tax return that usually you receive during the year. Put it into the months that usually you received it.
4. Sum all those income in (2) and (3) above
5. Now let’s do the REGULAR EXPENSE. Do for ALL THE REGULAR BILLS the monthly cost or quarterly cost on the month that you actually pay the bill. For example: if you pay the electricity quarterly on Feb, May, Aug and Nov then only write the amount only on that month.
   Includes: Electricity, Water, Gas, Phone, Mobile, Child Care, Petrol, Bus Ticket, Home Insurance, Car Insurance, Health Insurance, Credit Card Fee, Monthly Bank Fee, Mortgage Repayment, Car Loan Repayment, etc. Includes everything that you see the bill in regular basis.
6. Sum all those regular bill in (5) above
7. Subtract no (6) above from no (4) above and label it “DISPOSABLE INCOME“.  This is the income that you can use for food and other purposes.
8. Pay yourself first ! From this ‘DISPOSABLE INCOME’ decide how much you want to put aside as saving. You have to scan through all 12 months looking for the smallest one. This amount need to be consistent each month to make it easier for your self.
9. Subtract (8) from (7)
10. Do your Groceries & Food expense per month. You have to eat every day so, you have to budget enough for adequate food. If your number already to small, then you have to knock down some of the regular bill (Disconnect service, find cheaper alternative, downgrade, etc)
11. Plan all other purchase after subtracting (10)… holiday, new computer, new car deposit, new TV, etc
12. That’s it you made your self a yearly budget and you have been promoted to elite group above average that have a written budget on the house hold.

Software

The problem with using software mainly is that it will take some time for you to learn the software for you to be able to use it fluently. It does take some effort only to learn the software. The problem is if you found a difficulties about the usage of the software then you will loss your momentum to do the budget itself which by the above method will be just done within 15 minutes.

But if you insist you want a software. Quicken Deluxe 2009 is my recommendation for your personal budgeting/accounting need. It’s has simple and straightforward interface, but to make the most of it you need to track all your transaction (accounting), perhaps even on daily basis. You can visit our corner store for broader pick.

Conclusion

Doing a budget does not need to be very sophisticated. Even this 1-page budget that I describe above it’s enough to give you guidance. You may even show it to your mortgage broker or bank to prove to them that you have a budget for your house hold. Now the most difficult task is to execute the budget. At least now you have written guide, you know exactly that you will be into a problem if you don’t follow your budget as you can see those bill will come the next month (see your budget paper).

Do your budgeting , 15 minutes and you’re done ! See you with a budget soon !

Related Posts

• Improve Your Finance Position: The Big Picture
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• Everybody Can Be Rich Financially, Do You Know How?
• Wanna be Rich? Change Attitude First !
• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically