Personal finance part 1 – Building the foundation

After I graduated from the university, one of the first few finance/investment books that I read is Robert Kiyosaki “Rich dad, Poor dad”. Many people have read that and benefited from it. However, the degree of benefit depends on whether how well do you understand or believe the concept. If you always think, well, I got such little capital, that's not for me. Then, how can you become financial independent?

The concept is actually not new. There is this book called “Richest Man in Babylon” which is much earlier and talking about the same thing. In the old days in Asia, the term “financial planning” is unheard of. Nowadays, people get more wealthy and more aware of this concept. Government is also actively promote it. Despite the wide promotion of financial planning concept, I noticed that only some of my friends practice that. So, I intend to highlight some fundamental things that you should be doing for your financial well being.

Build a solid foundation, no matter at what stage of life you might be. If you are already following the rules, congratulations. If you still don't know anything about it, quick, get started now.

First, let's start with book keeping. Open a note book or excel sheet, start writing down your monthly income and expenses. Observe how much you earn and where do you spend money each month. Notice the expense amount required to support your lifestyle. Keep your expenses low.

Rule 1 – Keep 6 times monthly expenses aside and don't touch it.

This would become the rainy day's fund to protect you against unexpected job loss, misfortune or any unexpected. A good place to park the fund would be at fundsupermart Cash fund or Lion Capital Money Market fund. I don't advocate putting in fixed deposit which offer pathetic interest. As least the money market fund is very low risk and earn good interest. Another plus point is you can cash out within a few working days. Some people might choose to split between the FD and money market fund.

Look at your income and expenses, see whether can you increase the income or reduce the expenses? To increase the income, one has to find different way to achieve it. Other than the part time job which many companies don't allow, you can generate some passive income from other sources. For the expenses, try to cut down on the unnecessary things. Things like impulse buying, excessive personal indulgence can be reduced. Every dollar spent is an opportunity lost. But that does not mean that you need to stop eating, watch movie or travel. It just simply means spend within your means. Best way is to have a budget to control, how many shopping trip you go a year or how many restaurant meal you eat per month.

At this stage, you have the rainy fund set aside, income and expenses made clear. It is pretty solid now.

*** Updated 26 Sep 2008