Through the years of working with thousands of clients from all walks of life, I have discovered that most people are able to achieve their lifetime financial plans, goals and dreams despite their initial negative financial positions. The key to improving their financial position lies in the unique strategy called the “Budget Varaince”. Once implemented – with discipline, guidance and reviews, all of my clients will then be able to establish a winning financial road map. Most of them are now on their way towards achieving their financial goals and objectives.
What exactly is ‘Budget Variance’?
It is the methodical and systematic process of taking stock and having an objective review on your spending habits and income allocation. You may be pleasantly delighted to note that much of the expenses that you have incurred are actually not necessary and can be saved for other more important financial goals. Over time, you may even be able to create a substantial IGA Portfolio which will generate income streams for you instead of taking money away from you.
After having adopted a serious and active attitude towards this important exercise, you will soon be on your way to true financial freedom. Becoming rich is not about money alone. It is really about your personal values, habits, attitudes and advisory team.
An illustration of how ‘Budget Variance’ works:
Being able to reduce the initial expenses from $1200 to $820, you will thus have an ‘excess’ savings of $380 per month or $4500 per annum. If you invest the regular savings into your IGA Portfolio – that generates a 10% return over the next 25 years- you have added close to $500,000 to your net worth. All we have done is just a little adjustment on your monthly expenses to create a huge difference. However, the real benefit of such a strategy is not just about creating more wealth in the future. The real benefit lies in the conditioning of your attitude towards a greater consciousness of your personal spending habits and income allocation. The long term results are evident in the higher saving propensity, higher net worth and broadened financial perspectives that you will achieve along the journey towards financial independence.
“The rich believe that financial independence is more important that displaying high social status.”
The journey of a thousand miles starts with the first step… in the right direction. Take time to reflect, to take stock and to consider, “Where am I at now?” and “Where am I heading to?”
If every step that you now take is bringing you closer to realising your lifetime financial goals – keep it up and keep it going. However, if you still do not have the slightest idea where you will be in 5 years , 10 years and 15 years from now, you are most probably heading towards a financial disaster. Pull your hand brakes now and get a serious assessment of your current situation and position. Get help and create a clear financial road map, before you move off again.
Your future is worth it. Plan it well and execute it right.”
To understand the game of wealth management, you have to understand ‘Income Allocation’.
‘Income Allocation’ is the process of determining how your monthly income flow will be allocated amongst the various financial priorities that you have. The broad guideline for income allocation for the various age groups – Gen Y, Gen X and Baby Boomers, is as follows:
Have we ever heard of a church going bankrupt? The answer is an absolute NO! The biblical principle of giving 10% of our first fruit to God has worked so wonderfully well that since the establishment of such a God-given mandate, none of the churches has ever faced a financial crisis.
If you apply this same principle in your personal financial planning through the “Pay-Yourself-First” concept, you will greatly enhance your wealth-building capacity. The “Pay- Yourself- First” concept is a strategy of putting the highest priority for allocating a portion of your income into your IGA Portfolio before anything else. When you are able to create a systematic and disciplined method of allocating a portion of your income towards creating future wealth, you are well on your way towards achieving lifetime financial success.
If you do not take care of your future, no one else will. Each and every one of us has the responsibility to ensure that we take appropriate steps to plan and prepare ourselves for the future – at least financially. The earlier you start, the more you are able to harness the power of compound interest to work for you. Your journey will be so much more easy and enjoyable.
If you choose not to take a proactive approach towards building a more secure financial future for yourself, you may have to face the detrimental effects of your poor judgement in the later years. The impact may just be too great, and the price too heavy for you to bear. By then, absolutely nothing can be done. In other words, it will be a little too late – no second chance- forevermore.
Your future is worth it. Let us choose now to make a prudent and wise decision. Use the “Pay-Yourself-First” concept to work for you.
The general rule of thumb for prudent financial and debt management, is not to spend more than 20% of your gross income – whether single or dual, for financing your home mortgage repayments.
Home mortgages usually stretch for a very long period of 20 to 30 years, though some may be wise to choose a shorter term of 10 to 15 years, thus it is important not to over-gear or over-extent yourself in such long term debt commitment. You can never be certain that your income level is going to be as good today as it will be over the next 20 to 30 years. Remember – economic cycles and downturns do visit us once in a while. The last thing you want is to be caught in a situation in which you lose your job, and together with it your income, and still have to keep up with the short term, medium term and long term loan repayments in addition to your family obligations and responsibilities. It may just prove to be too much for you.
The key to financial freedom is to “Pay-Yourself-First”, not the banks or financial institutions – where you pay them hefty interests to satisfy your immediate desires. Do not get trapped by everyday enticing advertisements that tempt you to buy more, spend more and enjoy more through very “attractive” financing schemes. The “buy now and pay later” strategy offered by financial institutions has trapped so many in the rat race to buy the things they do not need; to impress the people they do not know, with the money they do not have! Ultimately, they find themselves being the real and only loser and end up having to pay a very heavy price because of their own folly. Do not be trapped by the “Lust of the Eyes”.
“The rich believe that financial independence is more important than displaying high social status.”
There will be no actual wealth creation until you create a regular flow of savings from your Employment Income or Business Income to an IGA Portfolio. The rule of thumb for transferring your earned or business income to your IGA Portfolio is 30%, on a monthly basis. It is important to note that the process is more important than the amount alone. The key objective is to establish a systematic and disciplined habit of savings and accumulation. It is interesting to note that:
“The rich allocate their Time, Energy, and Money efficiently, in ways that are conducive to building wealth.”
-The Millionaire Mindset.
Another guide is to accumulate a Contingency Fund of an amount equivalent to 6 to 12 months of your monthly expenses. This Contingency Fund or “Rainy Day Fund” is to be held in a highly liquid IGA Portfolio – bank deposits, fixed deposits, money market, investment grade bond or bond portfolio, and certain managed investment portfolios.
It is important to work hard and yet be able to play hard. A little reward system within your financial road map will make the long journey a little easier and a lot more fun. While you seek to reward yourself through having a higher quality lifestyle, please do not be carried away and over-gear yourself in borrowings to support your high costs of living. The rule of thumb for Income Allocation for your personal expenses is 50% of your monthly or annual income flow.
Remember – Only 50%. Should you violate this rule, you are doing it to the detrimental effects of your own financial future and well-being.
I have always been looking for financial models that work for me.
I have finally found one –
– Ashok –
Will share more in my next module. Enjoy your Journey without debt.