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Agensi Kaunseling dan Pengurusan Kredit Aras 8, Maju Junction Mall 1001, Jalan Sultan Ismail 50250 Kuala Lumpur Fax : 03-2616 7601 E-mail: enquiry@akpk.org.my AKPK First Edition 2011 The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.
ISBN 978-983-44004-2-2
Disclaimer: The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor. Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action. While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission. The names and details of individuals in the real life cases have been changed to protect their identities.
Chapter
Managing your cash is important to ensure that you have complete control over your finances. As cash is an exchange tool which allows you to buy goods and services, it is important for you to first understand your money managing habits. Do you normally run out of cash before your next paycheck arrives? Or are you the type who has more than enough balance in your bank account? Regardless of your answer, this first step of a realistic assessment will help you analyze how much cash you ear n against what you spend. This simple concept is called cash flow management. Analyzing your cash flow can tell you a lot about the nature of your income, spending habits and lifestyle requirements. To further understand what cash flow means, let us get started by learning about cash flow management.
Passive income
Cash outflows, on the other hand, include fixed expenses, variable expenses and discretionary expenses. Fixed expenses Are expenditures of a fixed nature. These expenses are generally necessities and the amounts incurred are normally the same every month. Examples include housing loan and hire purchase installments, rental payments, insurance premiums and childcare expenses Are expenditures that vary from month to month. Like fixed expenses, most variable expenses would also be considered necessities. Some examples include food, clothing, utilities, mobile phone bills and essential household items Are optional expenses. Most discretionary expenses are items which are considered non-necessities or nice-to-haves. Several examples include dining out, branded clothing, air-conditioning, cable TV, entertainment and non-essential household items
Variable expenses
Discretionary expenses
Now that you have an understanding of cash inflows and outflows, let us study its application through a cash flow statement.
To be in a good financial position it is advisable to have cash surplus at all times. A cash surplus not only allows you to keep money aside for unexpected expenses but also gives you an opportunity to build your investment. This will bring you closer towards achieving your financial goals. So how can you manage cash flow to achieve cash surplus? One of the most effective ways is through the use of a budget.
What is a BUDgEt?
A budget is a plan for managing your cash flow and is used to estimate your future income and expenses. To put it simply, a budget lists all your expected cash inflows and outflows to assist you to make prudent financial decisions.
As time evolves, your basic needs may extend to more than just food, shelter and clothing. Your want today, may become a need tomorrow.
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Take this example. An individual 20 years ago did not view mobile phones as a need. Conversely, in todays modern world, a mobile phone is considered a necessity which makes it a need instead of a want. However, when you choose a mobile phone that is expensive and has all the latest features, you are shifting this need into a want. The decision you make with regard to what you need or want will directly affect your spending. Delayed gratification Delayed gratification means delaying your wants to a later period instead of having it now. Whenever you intend to make a purchase, especially when it is a want item, take time to think whether it is within your budget. Living within your means requires you to learn how to say no to unnecessary spending. Look into substitutes for your needs and wants especially if it does not fit your budget. Ask yourself these questions before you spend: I n s t e a d o f b u y i n g a c a r, w h y n o t u s e p u b l i c transportation? If you really need a car, can you consider getting a second-hand one? If you need a mobile phone or a computer, will a basic model serve your purpose? If you want branded clothing, can you substitute for reasonably priced and good quality clothing instead?
A budget needs to be realistic and tailored to meet your earning capacity and spending needs. Living on a budget does not mean sacrificing all your luxuries. It simply means that you will have to plan and at times change your perceptions and spending habits. spending wisely A key to a successful budget is to spend less than what you ear n. When you have the urge to buy something, pause and ask yourself the following questions: Can I afford to buy it? Do I really need it? Is there something cheaper? Can I delay buying it?
tiPs
On sPEnDing WisELy
TIme Plan your purchases to avoid making multiple trips to the stores Optimize the use of your resources, including fuel and time Avoid getting caught in last minute shopping frenzy Stock up household items in advance to avoid festive rush lIsT Always have a shopping list to avoid unnecessary buying Avoid buying things you do not need Always keep to your budget COmPAre Compare prices at various outlets before buying Keep a price book to track prices on frequent purchases
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guide
1 2 3
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Save at least 10% of your income Make your savings automatic through a salary deduction scheme or other similar arrangement Set meaningful and significant goals to motivate yourself to save. You can set short, medium and long term goals After having saved the first 10% of your income, gradually challenge yourself to save a little more
Every time you get an extraordinary income such as a bonus or cash gift put part of it into your savings account immediately If you get a salary raise, keep to your current standard of living and put the additional money in your savings
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Cash and its equivalent, such as savings accounts and fixed deposits
Personal belongings that can be sold such as jewelry, gold, art and antiques
Loans, including your student loan, bank loans and other loans
after knowing the benefits of having a budget, you are now ready to create your own. all it takes are three simple steps: 1. List down all your sources of income Your salary should be net of EPF, tax and SOCSO deductions
2. List down your expenses Your expenses should include fixed expenses, variable expenses and discretionary expenses Here you need to pay yourself first as savings (minimum 10% of your total income)
3. Determine your net cash flow position If it is a surplus, well done! Try to keep to that budget of yours in your actual spending If it is a deficit, revise your budget by cutting back on discretionary expenses until you get a positive net cash flow position Ideally you want a surplus to be able to build up your emergency fund
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As you can see, it is not difficult to create a budget. However, successfully maintaining and sticking to one requires a little more time and effort. You also need to be realistic and flexible in your approach. If you have a moderate income, do not expect to save a lot of money in a short period of time. Also there may be times when you need to revise your budget to cater for unexpected expenses. When you are in a good financial position with cash flow surplus, then you are ready to invest. There are many types of investments, including real estate, stocks and bonds in the market. Returns on these investments vary in tandem with the risks associated. If you plan on being an investor, be mindful of your risk appetite levels before investing. Invest only on products that are familiar to you Do your homework and make sure you understand the risks involved Do not put all your eggs in one basket. Remember, spreading your money across a variety of investments is the key to spreading your risks
FinanCiaL sCaMs
When investing your hard earned money, be extra careful of getrich-quick schemes. Such schemes promise high returns with little or no risk. These get-rich-quick schemes are frequently promoted through various channels, with internet and short message service (SMS) being the more common platforms. The next time you come across these get-rich-quick schemes, be vigilant and remember that if it sounds too good to be true, it probably is!
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The golden rule is not to be greedy. Always check with friends, family and professionals on whether such investment opportunities are genuine or otherwise, even if it is recommended by someone close to you. Find out more about the offer. Be suspicious particularly of investment that offers high returns, low risk and is free of investment costs, as it is unlikely that a business venture can provide all these. Browse websites of BNM (www.bnm.gov.my) and SC (www.sc.com.my) for further information
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takeaways
A cash flow statement shows you where your money is coming from and where it is going over a period of time A budget is simply a tool to help you manage and track your cash flow more effectively A budget is the best tool to ensure you spend and live within your means Having savings is very important as it will help with emergencies A net worth statement gives you a snapshot of your financial position at any given time and serves as a tool to help you track your progress
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Checklist
Draw up your monthly cash flow statement showing all inflows and outflows Come up with your budget by setting aside at least 10% of your income as savings Draw up your net worth statement to see how much you are worth now
Appendix 1.1 : sample of budget and cash flow statement Appendix 1.2 : Blank template of budget and cash flow statement Appendix 1.3 : sample of net worth statement Appendix 1.4 : Blank template of net worth statement
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sELF assEssMEnt
1. Which of the following are the main components of cash flow management? a. Income and expenses b. Assets and liabilities c. Debtors and creditors d. Profit and loss account and balance sheet 2. A budget helps you to _________ a. live within your means b. achieve financial goals c. set aside money for savings d. all of the above 3. Why is savings important? a. To plan for your retirement b. To prepare for emergencies c. Down payment to buy your first house / car d. All of the above 4. How many months of living expenses are recommended for your emergency fund? a. 1 - 2 months b. 3 - 6 months c. 8 - 9 months d. 12 - 24 months
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5.
What is your net worth? a. My total liabilities plus total assets b. My total income plus total expenses c. My total asset minus total liabilities d. My total income minus total expenses
6.
What is the minimum monthly recommended percentage of your income to be set aside as savings (apart from EPF contribution)? a. As and when you have it b. At least 50% each month c. At least 10% each month d. None of the above
7.
What is a good financial habit? a. Having monthly repayments of more than 40% of your gross monthly income b. Tracking your expenses and cash flow c. Living lavishly d. Paying the minimum amount on your credit cards
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