These 4 tips from the workplace can help Singaporeans keep their bank account in good shape.
At your workplace, you have likely come across several practices put in place by your boss to help you or your colleagues manage your everyday work. But did you know that most of these methods can be adopted for personal use?
Just like how corporations apply accounting practices, principles and tools to manage their finances, so too can you use them for greater clarity and control over your personal balance sheet.
Setting good practices in place is the first step to taming a runaway budget, so try implementing these CEO-proven tips, and observe the difference they make to your bank account.
Keep A Profit And Loss Statement
Whether a business remains successful ultimately boils down to whether it maintains a positive profit and loss statement (P&L).
In much the same way, the frequency with which your personal P&L stays in the black - and the magnitude of it - is a reliable indicator of whether you’ll be able to sleep soundly at night in the days to come.
Get in the habit of keeping a monthly balance sheet. Just a simplified version will do, where you note down your income, expenses, and the difference between the two for the month.
At the end of the year, compile all 12 balance sheets. Then, total up all your outstanding credit card balances (and other unscheduled debt*), and add the amount to your “Expenses”. This will generate your very own P&L for the year.
If your P&L shows a significant loss (more than 10%), you need to reduce your expenses, or increase your income. You can well imagine how worrying it is if your company ran at even a 10% loss per year; you should be equally worried to see your own P&L in this state.
*Quick explainer on unscheduled debt: When doing your P&L, you do not have to include sources of debt with an existing payment arrangement, like mortgages, car loans or personal instalment loans. That’s because you are already paying them off monthly.
However, credit card or other debt you are not currently paying off is not represented in your balance sheet. Paying the minimum sum on your credit cards does not count, as minimum payments don’t do much more than preventing your debt from getting larger. Hence, you need to tally this source of debt in your P&L to have a clear grasp on your financial situation.
Know Your Expense Ratio
It’s common for a start-up (or an established business launching a new product line) to splurge on marketing costs to drive sales, increase market share and get new customers. The numbers can reach alarmingly lopsided ratios, such as spending S$3 in marketing to earn S$1 in revenue.
But that’s part of doing business, and companies usually have investor money to back them up. However, as you can well imagine, this is unsustainable, and companies eventually have to find some way to reverse that ratio, or risk winding down.
Similarly, if your spending has a habit of exceeding your income, you’re treading dangerous waters. If this is happening, but you never really run out of money (possibly because you’re tapping into your savings for a top-up), you probably won’t feel like anything’s wrong.
However, your expense ratio will tell a different story. Put simply, your expense ratio is the percentage of what you spend out of your paycheck. So for example, if you earn S$3,000 per month, and spend S$2,400, your expense ratio is 80%.
With 20% already going to CPF, this equals an expense ratio of 100%. At this point, you’re living paycheck to paycheck, and not saving for important things like retirement. And if your expense ratio crosses the 100% mark, you’re spending more money than you’re earning. That is not a great way to carry on.
Start A Payment Register
Hopefully, by this point, you’re motivated enough to start paying off your debts. Here’s a tool to help you do that.
Start a payment register, which is a spreadsheet you use to note down recurring payment dates, and the final payment date for each credit card or loan. This is very handy if you need to keep track of multiple bills, such as credit card payments and personal loans.
Not only will you have a clear idea of when each payment is due (helping you avoid unnecessary late fees), more importantly, you will gain the ability to forecast when exactly your debts will be paid off.
Don’t underestimate the boost this can give you. When you’re drowning in debt, it can be very comforting to be reminded you only have 5 payments to go on a debt costing you S$300 per month.
Keep A Floating Sum
Businesses don’t deposit all their takings at the end of the day. They usually retain a small sum which they keep on hand to meet certain types of expenses.
When applied to personal finance, this means keeping some liquid cash on hand to cover unexpected expenditures, such as a last minute celebration, or an overlooked bill.
We recommend keeping the float amount small - between 1 to 2 weeks’ worth of expenses. So you don’t get confused, keep this float separate from your savings and emergency fund.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimize happiness and enjoyment in his life.