I would first like to start off by asking two key questions: ‘Do you save? How do you save?' If your answer is ‘I save and I save all my money in a singular bank account, or that your savings each month is dependent on how much balance you have left after all your expenses at the end of every month’, then this article may be very apt in helping you to rectify this particular problem on hand - namely the organisation of your monthly cash flow.

More often than not, the first and most important rule of managing your cash flow is to “Pay yourself first’. This means that the moment your salary is credited, you should adopt the habit of transferring 10% of your income into an account which I term as ‘Emergency Fund’. This particular account should have a minimum of 3-6 months of your gross income. This comes in handy in the event of a rainy day such as when you are jobless, this serves as a fall back option for yourself.

After which, set aside another 10% into another account for your medium to long term saving goals such as wedding, renovations and honeymoon etc. If you embark faithfully on this account from the moment your first paycheck gets credited, think about the amount this account will generate by the time you need the cash to execute your medium to long term goals(for example: wedding expenses).

Pay yourself the last 10% into yet another account for your short term saving goals such as further education or family vacations. Do not allow yourself to touch this account unless it is necessary.

As for the last account that you have, it will be known as ‘Expenses Account’ where you use whatever money inside to maintain your day to day living.

 Identify Your Expenses

Great! Once you have established a minimum of 4 accounts, you are ready to embark on your journey to financial freedom. The next important step is to manage your expenses every month. Identify your fixed and variable expenses and do a check list of what is deemed essential and those that are not. I notice that many yuppies and executives love to spend money on fine dining, club membership and attire. Perhaps such items signal a climb up the social ladder, and this can prove to be more important than actually having more digits in one's bank account. To be fair though, many low-medium income earners also fall into this money-sucking trap.

I was previously a victim of this social disease. I splurged on buying branded labels, indulging in entertainment via clubs and restaurants. Although I did not sign up for club membership per se, I was spending the same amount on facial care products. On any given month, I could easily rack up a few hundred dollars in the pursuit of vanity.

The aha moment finally struck me when one fine day, as I was looking through my bank statements, I realise that despite the fact that I have been working for a couple of years (and drawing a fairly decent income, mind you), my savings didn't reflect that reality. My savings couldn’t even enable me to hold a wedding, and even if it could, I would be back to square one after the event. That was the turning point of my life where I told myself that enough was enough. I must not succumb to that social temptation because in the long run, it would not be feasible for me based on the income level that I was drawing. Honestly, it was a daunting task, because having been used to spending freely on my luxury items, to switch gears and to live more frugally required a certain bit of adjustment. Thankfully, I found a partner that is quite the complete opposite of me and through her, I was able to make the adjustment - not just physically but mentally - to have an overhaul in my lifestyle.

Notice that I didn't use the word ‘never' but instead I chose ‘abuse’. The rationale behind this is simple: Future money can be put into good use such as leveraging on loans for property or establishing a new business. The returns can be multi-fold and at the same time, you stand a chance to earn passive income. However, if you use a credit card to purchase items without the ability to pay them back then your future money will instead move from the category of generating potential income to the category of clearing debts. In the beginning, it may seem like a small deal, using future credit to purchase small items. However, as the saying goes “it only takes 21 days to form a habit” - once it becomes habitual, the amount will increasingly vary. This can be seen from the numerous newspaper reports on young individuals going bankrupt due to excessive credit card usage. Therefore, never ever abuse future money.

Loans have been grossly misunderstood. Is loan a bad thing? The answer, quite simply is no. Taking on a loan can prove to be an advantage for you as long as it is kept within the limit of 35% of your income, and bearing in mind the purpose of the loan. Taking up a loan to offset large amounts of fixed expenditure (for example: a house) ensures that your cash can instead be used to generate revenue which may exceed the interest of your loan. This is simple math. If your loan interest is 2%, but your potential income growth with the loan is 5%, which would you choose? The logic of keeping to 35% is to ensure that there is a reasonable limit for you to adhere to rather than blindly taking up an amount that you can’t afford in the long run.

The last rule that I have set in place for myself in terms of managing cash flow is to live a simple lifestyle. The rule of thumb here is to identify what is more important to you. Surely, relationships prove to be more valuable than material possessions. At the end of your journey, what would you have sought to accomplish? A deathbed surrounded by your loved ones, or a deathbed surrounded by your loved possessions?

When you keep that end goal in mind, you will be better able to let go of the mentality of “attaining nirvana via branded labels”, and to be better able to live within your means. Simplicity, by default, ensures that you have a better cash flow, because your money is freed up for more revenue generating resources, instead of being tied down in debt, and inadequacy in the last stages of your life (for example: retirement).

Live within your means. If you can afford luxury items after setting aside your savings, I do not see any reason why you should not indulge in a little pampering. However, if you have not been saving and yet continue in your habit of splurging then to improve on the management of your cash flow, you need to adopt some changes!

Always remember, the best things in life are truly free.

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 Are You Ready? is a new proactive outreach initiative by CPF Board which aims to educate Singaporeans on how to make key financial decisions in their lives. This year, we will be focusing on 4 key areas, namely Healthcare, Housing, Retirement and General Cash Flow Management.

To help users along, a c hecklist is devised for each key area as a quick guide to check how ready they are in making this decision. The checklist will be made available on both online and hard copy version.

Please visit our website www.areyouready.com.sg for more financial planning information!