Hope this is helpful for anyone who is looking for basic financial management.
*Disclaimer: I am not a financial planner nor I am expert in financial planing. However, I do love to share the hear-say that is happening along my life journey. Thus, this is what I found it so useful that I can't help to share it with everyone who is in need of financial help.
*This is a very basis financial management where it only covers the distribution of your incomes.
My sharing is basically based on a JARS system, where you can found through here.
Source: http://www.slideshare.net/myrgold/money-management-101-the-jar-system
OR just simply google JARS system.
In my personal opinion, to be financially free, there are stages that you need to breakthrough one after another. By far, in my case, I discovered that there are at least 7 stages that you need to aim for. I will elaborate more one by one.
7 Stages
1) Understanding Financial Freedom.
2) Establishes Emergency Fund.
3) Knowing your expenses.
4) Create JARS system's habit.
5) Be adaptable. (Emergency Fund allocation).
6) Achieving 30% NECS/ Increase income.
7) Create passive income equal or more than your expenses (Financially FREE!).
1) Understanding Financial Freedom - the right mind makes the right direction
First and foremost, the only reason why we are working, earning and saving is to be financially free. The fundamental meaning of Financial freedom is that you have to create passive incomes where it is equal or override your monthly expenses. Passive income = OR > Expenses. The goal of achieving financial freedom is to have the lifestyle you want without compromising your basic survival need. In simple words, you do what you WANT to do, and not because you HAVE to. This can be seen as a middle working class adults where they struggle at work just because they need the money to survive as compare to financially free individual where they work for passion, interests or/and leisure need due to the fact that their passive income is sufficient to cover their lifestyle expenses and working is simply a bonus for them.
The next thing is to discover your desired LIFESTYLE. This is what the extra incomes are for once you've financially free. The most common examples are individuals who love to travels, to see what the world outside have to offers. However, travelling comes with a cost, and often it costs quite a big sum of money. Hence, you need to come out with the calculation of your desired destination. Says, we make it as RM 2000. Then, we assume your expenses is RM 1500 per month. Therefore, your passive income have to be at least RM 1500 + RM 2000 = RM 3500 to match the lifestyle that you desired. According to your desired lifestyle, you come out with your figure that meet the needs.
Vocabulary
*Expenses = This includes everything that you have to spend on a monthly basis which may include, car loan, house loan, food, petrol, insurances and etc.
*Passive income = Income and money where it does not required a constant and additional effort. Such as money coming from investment, rental from houses that you bought, business and etc.
2) Emergency Fund - backup plan that keeps you survive during down time
From the words itself you can figure out that this Fund is meant for helping you in the midst of crisis such as retrenchment or unemployment. To be frank, there are often times where company undergo restructuring, global economic crush or simply you suffer major illness and accident where you can no longer produce income for yourself. Hence, it is a MUST that emergency fund must be establishes before anything else. So if any of the above happens, you still able to survive and find another stream of income in that period of time. It really depends on individual how long they would like to set. I would suggest it to be in the range of 6 months to 2 years. And how much is needed for one month? See next stage.
3) Calculating Expenses - knowing what kill you off
Calculate your monthly expenses as to how much it is needed for one month to keep you from survival. You need to take into account that everything that you need to pay month and there is no reason that you can escape from it. This include, all the bills (water, electric and etc), food (food to keep you survive, not expensive food), accommodation (whether it is your house loan or rental), insurance (this will be elaborate more on the coming day), family obligation (if you have to), car loan, phone bills and etc. This often doesn't include your gym membership renewal, and other forms of entertainment that is not necessary.
Keep track of your daily expenses, so that this figure will come out at the end of the month, after few months, you can roughly gauge the amount of money it is needed for you one month, then you leave room for some buffer, for example: if it is RM 650 total, you make it RM700. After that, if you are aiming for 6 months of emergency fund, simply multiply it with 6, RM700 x 6 = RM 4200. So first bunch of money to save is RM 4200. This money is UNTOUCHABLE, meaning you cannot, for whatever reason, use this money for anything unless you are unable to produce income in the meantime. Okay, we shall move on.
4) JARS System - the habit to the path of financially freedom
Imagine there are 6 JARS in front of you. And each of them label with different name. I suggest if you are really bad at imagination, buying 6 JARS would definitely help you better at this stage. I hope this pictures serve the illustration well. :D
6 JARS money management system
NEC for necessity, PLAY for play/entertainment, LTSS for long term spending saving, EDU for education, FFA for financial freedom account, GIVE for contribution to the society.
JARS system basically meaning separate your incomes into 6 categories and each categories carry a certain amount of percentages and we will go through them one by one, explaining the usage and how much is needed for each.
For easy calculation, we will make your income as RM1000 per month.
NEC (55%) - the necessity
As the name suggests, it means thing that is necessary, it is basically similar to the expenses I mentioned above. It includes everything that is necessary for your survival and bills that you can't escape from. Given your income, your expenses should be RM 550 to be precise.
PLAY (10%) - the FUN!
This JAR people often explain it at the end, but I chose to put it next to necessity, so that you still have the joy to read it more. We would all love FUN, and this JAR is the JAR that you need to blow it off all the way! What does that mean? It means, you should never hesitate to spend this money as this is meant for entertainment! A reward for all your hard work!
Other than that, there is reason for this JAR to be exist. As we know that if we keep fake the smile, eventually we will be happy as well. Practice to be tough and strong and you will eventually becomes tough and strong. Same thing for this JAR. Remember about our DESIRED LIFESTYLE? If your desired lifestyle is to be rich like someone else, that you can go to the High standard France restaurant to enjoy dinner without even looking at the menu, or you want to enjoy expensive massage where you don't have to wait for bargain and super deal offer. This JAR helps you realize your dream temporarily. It gives you to the thrill to go further. It helps you to stay close with your imagination and dreams, to make thing more real for you. So, you put 10% into this JAR which is RM 100 from the RM 1000.
LTSS (10%)
This stands for long term spending saving. This JAR is meant for spending that your buying power is impossible or unable to purchase within a month. The items usually cost more like Television, refrigerator, laptop, handphone, and this could meant for an expensive travel that you wish to. So what do we do for this account. Imagine you have these 5 items/things that it is on the to buy list. There are two ways of doing this. First way, you divide the percentage and accumulate until it is sufficient to get the items. So 10% which is RM 100 you will be dividing it into RM10 each for each item each month. It seems quite long to get the item you want? You may use the second way, which is to set priority for your item, buy the item that you need the most first. If it is laptop, RM 100 will be save each month till it is enough to buy your item.
There is another way of doing this which I suggest you can try if you have good discipline which is the usage of credit card. If the installment is within the range of RM 100, then you can buy the laptop first and pay the credit card each month RM 100. If it is only costs RM 50 installment each month (just example), and it is the same for TV as well. Then you may go and buy two as well as long it is not exceeding RM 100 per month.
EDU (10%)
(To Be Continued)
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