First, let us look at your monthly tracking. Does the variance positive? Have you manage to list down all source of money income including from credit cards, personal borrowing money, other income source aside from you main salary or even that RM50 that you found on the road on your way to work today? Focus on those list of income. Our objective is to ensure that all our income are positive income which will not affect our next month budget. Examples of positive incomes are your full time salary, part time salary or passive income. Negative incomes are credit cards, personal loan, borrow money or any other source that will require you to pay back by time. Plan to reduce from having too many negative incomes. Negative incomes are not all bad. It can also be tame if use wisely. But if you do not know how to improve on utilizing negative incomes to your benefit, target to zero out negative incomes in order for you to be more in control now and also later in future.
Prioritizing of eliminating negative incomes will base on its “compounding interest”. I will explain later in other topic to further derive the power of compounding interest. Here are my plans when I eliminated my own negative incomes:
- Credit cards – Being an unsecured loan with 16% to 18% per annum interest, credit cards will suck up on your positive income drastically. The basic rules are to maintain only 2 credit cards and I will explain later how to choose and make fully use of your credit cards. Right now, plan to terminate as much credit cards that you should not have. My proposal is to go to bank, block your credit cards and request bank to convert your outstanding balance to term loan. Term loan normally at a range of 6% to 9% per annum interest which directly chop half of the interest for the credit cards. Bank that are, in my experience, would support such conversion including Citibank, HSBC, RHB, AmBank (MBF) and Standard Chartered. Those bank whom I knew do not offer term loan at all would be AEON and EON (if you plan to use their credit cards, I would propose not too). Another most important thing you need to know about credit cards, “NEVER EVER TAKE CASH ADVANCE....EVER”.
- Personal loan – Personal loan is a form of secured loan, so its interest rate is much lower. Check with your bank to see if the personal loan is having compounding interest or not. Some personal loan, directly calculated the interest and adds in to your principal before determining your monthly payment. For this type of loan, no further harm it can do to you, just continue to maintain healthy monthly payment until you paid off the whole loan. For loan that introduce compounding interest to its balance, try to pay more monthly and not to skip your monthly payment. If you skip your monthly payment, the interest calculation will be higher, which means you will need to pay more. For now, plan to pay off your personal loan and do not plan to make new loan until you cleared off your current loans.
- Overdraft accounts, car refinancing, house refinancing, mortgage (including gold) – These are some of the tools that you can use in order to get liquid cash to support your lifestyle. Since they are tools, how good or how bad these tools are depends on how you use them. Please do not plan to take up this type of income unless you know exactly how they work (I will open up topics for these type of income later). Only take up these types of loans if you plan to have capital for investment. But if you plan to use the money for spending, I highly do not recommend it.
- Borrow money – It is classified as borrow money only when your borrower did not charge any interest. This includes borrowing money from your family, your friend or even your boss. If you “borrow” money from someone who charge interest (such as along) then that is categorized under personal loan. Borrow money is the most subtle source of negative income since there is no interest charge. However, since you are borrowing money from someone close to you, it is ethical to pay them back accordingly to what you have discussed with the borrower. If you plan to pay back by next month, please make sure you do so. If you plan to payback on monthly basic, discuss properly and make sure you do not skip any payment. Borrow money do not impact much on your budget but it have a lot to do with trust. Do not loose the trust from those who are close to you because you never know when you going to need their help for even “bigger favor” somewhere in future.
Once you had your fun, now focus. You need to set a goal of how much your budget income should be. Fill up in the excel file with these actual income information:
- For your main income (in my case is my full-time salary), fill up your net salary. Try to put down your average net salary. If you do not how much your employer pay you every month (duh?), consider your income as 85% from your basic salary. Do not include any month to month allowance (overtime, inconsistent allowance or bonus). This will help you to shape your budget from your main salary instead of your allowance. So, if during tough time when you do not have a good allowance, it will have the least impact to your budget.
- For other positive income, fill it up as average as possible. If you have passive income, it tend to move up and down throughout each month. Go for the average.
- For negative income, it is up to your own plan as what I have discussed earlier. If it is too tough for you to immediately stop using your credit cards, for example, try to plan to slowly reduce the income through your credit cards or other negative incomes from month to month. The main points is sustainable and continuous. It is good to reduce them by 10% each month rather than not to reduce them at all.
After you key-in your average income, take a look at variance. It should show a negative number now. That negative number showed how much you should reduced your spending in order to be comfortable with your planned income. Do not panic first especially if that figure is sky high. For now, just believe that you can achieve it.
Now, focus on your spending. First, let us look at Fixed Monthly Expenses. You already know how much money you need to save, so look for expenses that you can chop off. Here are some of my ideas.
Hire Purchase (Car)
As for now, I have not find any tips on how should we approach our car loan payment. Azizi Ali (Malaysia very own Money Coach), once said that a car is just a tool to get you from A to B. His idea of having healthy car loan is that the monthly payment must be lower than 15% of your net salary and the car loan must be able to fully settled within 3 years. If you are currently paying more than that, means your car loan is too heavy for your income to bear. I am sure a lot of us already overshoot this guideline. It is okay, I guess. But if you are one of those who is planning to buy car, it is good to ensure that the car payment is affordable. For those already with car loan, let us stick to the monthly payment for now.
Home Loan is compounding interest based on its balance loan. This means, the longer you take to pay off the loan, means the more interest you have to bear. Furthermore, since home loan is a long period commitment payment, I am sure you are hoping that the monthly payment need to be lower even though the tenure (period of payment) is extended. In order to lower the payment, you can refinance your house and look for a longer tenure and further reduce the monthly. But before you opt to this option, please look for more tips from me in regards to home loan, so that your decision can be a wiser one.
If you are paying 5% minimum only, you will not be able to settle your credit card payment fast. Most of the monthly payment will be drained out as finance interest. So, you need to pay a bit more than 5%. Go to this link (http://www.creditcards.com/calculators/minimum-payment.php) and use the calculator to see how long it takes to clear your outstanding balance if you only pay the minimum every month. For example, if you have RM4000 outstanding balance and you stop spending on your credit cards today, if you only pay 5% the minimum monthly, it would take you 83 month (almost 7 years) to clear off you outstanding balance. By that time, you already paid bank RM1600 interest. Imagine that, simply hand over RM1600 to bank just for the service of lending you RM4000. And what if you pay only 5% minimum but still do not stop using your credit cards?
First step, try to stop using your credit card. If cannot, try harder. Hehe. It is crucial that you do it. Then pay a fixed amount every month, which must be more than the required 5%. For example, if your outstanding balance is RM4000 and you pay a fixed amount of RM200 every month, you will be able to settle the balance within 24months only (2 years). Try out this calculator (http://www.creditcards.com/calculators/payoff.php) to simulate how much needed to pay and how long it takes to settle your credit card.
I am struggling to pay my 5% minimum, how can I pay more than that? Is this what you asked yourself now? Do you want to settle your credit card fast at the same time pay lower than 5% minimum? I would propose you to go to your bank and asked to convert your outstanding balance to term loan. You can use this calculator to simulate your term loan situation (http://auctions.com.my/Calculator.asp). For example, let say that you manage to get a term loan with only 9% interest rate. You plan to settle your credit card outstanding balance of RM4000 within 5 years. With term loan, you will only have to pay RM84 per month! What if you want to settle them within 2 years? Your monthly payment will be RM183 which is even lesser compare to the credit card simulation that I mentioned earlier. The trick is the compounding interest rate. As long as you have your credit cards eating your money at 18% interest rate, you will always need to pay more.
Every time you need to buy insurance, asked yourself, do you really need them? There are so many types out there for Life, Personal Accident, Hospitalization and Medical Card. Each of these emergencies will definitely impact your life and source of income. So how could we live with such risk if we do not take up insurance? Insurance company willing to bear that risk for you with certain monthly payment (premium). By the time the insurance reached it matured coverage period, they will no longer cover you and your premium payment will not be return to you. So, if you take a Personal Accident insurance that cover you for 10 years with RM20,000 coverage, can you ensure that you will meet with accident somewhere within that 10 years? You have to have an accident right? If not you will lost all your premium right? So, which one is more important, not to have an accident or to loose your premium? I would like to advise you to take back some of that risk. Do not share them with insurance company unnecessarily. Of course you would need some money in case, one day, something bad happen to you. So, why not stop paying insurance company, instead put your monthly payment into savings account or investment. That way, if in future you need to use the money to support you, you have the cash reserve for you to use. If you are lucky enough not the have any bad thing happen to you, then that money can go to your children future or spend for your retirement. Look through considerably over the risk. For me, I maintained having 1 Life Insurance which joint with Unit Trust Investment so that I can ripe both benefit. I have canceled my Personal Accident (PA) and hospitalization insurance and start savings using the monthly payment. If you can not effort the monthly payment, then ask yourself if you still want to pay for the insurance or not.
If you are like me who need to have a constant connection to Internet, then judge your service provider to see if it is the most value for money. Basic guide for Internet subscription: wired connection is faster, reliable and much cheaper compare to wireless. Wireless such as EDGE, 3G and 3.5G broadband is expensive compare to value per speed and most of the time is unreliable. The extra money you pay for the wireless is on its mobility. This would depends on your lifestyle. Do you need Internet while on the move? If you have the option, go for wired services instead. In Malaysia, for wired connection, you can opt for Streamyx or Time Broadband. For wireless, you can always compare between Maxis, Celcom, DiGi, P1 and U Mobile to find the best package that works for you and your coverage areas.
Satellite TV Provider
Here is Malaysia, most of home installed with Astro. We do not have any other option, either Astro or have to rely on over-the-air TV Channel. Astro packed quite a punch with it list of exciting programs to choose from. Different package comes with different programs and also different price tag. Choose wisely. If you subscript to a package which you do not watch it at least 50% of the month, then why bother paying money for them. Get Astro to change your subscription and go for those channel that you watch more frequently. Maybe I did not watch it that frequent, but just in case I want to watch them later, it is good to have what? To spend your money wisely, "Just In Case" habit is not healthy. Pay only for what you need and drop the rest.
Utility Bills (Electrical and Water)
You need to use them everyday. Can you terminate your electrics or water to save money? I don't think so. What you can do instead is to save its usage:
- Lighting - Every time you want to switch on a light ask yourself, "Do I need too turn this on?" If your living room and dining room is next to each other without barrier wall, turn only one light from one of the room. Use fluorescent light more than incandescent light since fluorescent light use less energy. If you have smaller room, use short fluorescent light compare to long one. Fluorescent light tend to use more energy during start up. If you plan to leave a room only for less than 5 minutes, leave the light on. If it is longer than 5 minuts, switch it off. If you prefer a gloomy feeling of incandescent light, opt for energy saver bulb instead, it helps to save up to 80% energy than the conventional ones. When your family went to bed, switch off all the lights. We tend to leave the light on because we want to scare off thief (did it really work?). If someone wants to break in to your house, having light off or on does not really matter much, right. So, if you stay in a dense neighborhood, turn off all your light and rely on the street light or your neighbor's light (just hope they also not energy-saver freak like you, hehe). If you stay in a mansion in the middle of jungle, I guess you should turn on some light while in bed, just to get rid off that gloomy scary feeling (uh, spooky).
- Fan - Turn on your fan only when need too. If it is a windy day, just open up the windows for that fresh breeze. When you turn on the fan, go for lower speed. Higher speed means more energy needed. If your room has high ceiling, where even the highest speed of fan will not do any good, then go for stand fan or table fan. Try to get fan that have timer so that you can set the timer to switch off the fan, for example after you went to sleep.
- Television - It was designed to be watch, so only turn it on if you plan to watch it. I have a nag of switch on my TV if I want to watch it, and turn it off once I turn on my notebook so that I only need to focus on one appliance at a time. If you like to lay down in front of your TV and watch it while doze off, set it on sleep timer so that it will switched off once you already fall asleep.
- Fridge and freezer - You need to turn it on all the time to keep your food fresh, right? But you can save energy by setting the temperature dial to the minimum. Both my fridge and freezer always turn down to minimum and I never have an experience of bad food in them. Even my freezer do not have even the tiniest of icicle but my food stay fresh even at lowest setting. If your food is hot, let it cool to room temperature before put them in fridge. Then do periodic clean up on your fridge and freezer and throw off all the "old" food if you do not need them. The lesser food in your fridge, the lesser energy it need to keep it cool.
- Air condition - Try to get those with inverter to help save energy. Set it to timer so that it will turn off, for example after you go to bed. Stick to "Economy" mode if your air condition have that option. You can also turn on your fan at the same time to flow the air, this way it gives a cooler feeling without having to set your air conditioning to the lowest temperature. Remember to clean up your air conditioning monthly. Having dust clog in the filter means it have to work more to blow you more air.
- Microwave - I am sure we tend to rely on them for a quick cook. If you have time, cook your food on stove rather than in microwave. We do tend to want everything to be fast, but if we plan our cooking time earlier and use the stove more than the microwave, we can cut some of our energy usage.
- Washing machine - Only use your washing machine once you have full load of laundry. It will save energy and water too. Having less frequent use also help to extend your washing machine lifetime. So, try not to be too hardworking to wash your laundry daily.
Do you have home line phone or you use mobile phone? If you can rely on mobile phone, then try not to have a home line. This phone service normally have monthly subscription fees either you use them or not. Track your monthly phone bills. If you spend more on subscription fees than your calling charge, just terminate the service. You can also save on your mobile phone bills. Take one month statement and review all your calls, sms, mms and internet data usage. Using the same style for use, simulate across other service provider. Find the lowest charge that you need to pay with your style of usage. Last 3 years, I spent around RM300 on my mobile phone bills. After I reviewed my usage, change to a more value for money service provider, I am currently having almost fixed monthly charge of only RM80. Check out between Maxis, Celcom or DiGi for the best deal. Look through prepaid and postpaid service too and I am sure there will be a better option that you can use to save on your mobile phone bills. With current option to stick with your number while changing service provider, you should not have any excuse to change to a better value service provider.