Financial Management By Smart Financing – Part I
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It’s important to keep your personal finances in order, and reading articles about how to manage your personal finances is a great way to start. Since you are reading this article, you have made a first step in learning what personal financial management is all about, from a view point of SMART Financing. If you are looking for another plain article to remind you to start saving towards financial freedom, we are sorry that you have picked up a wrong article to read and you may flip this page over. SMART Financing teaches an evolution of financial movement where the key towards having strong financial management is via leveraging. It’s a concept where the objective is to ultimately achieving financial freedom via SMART leveraging (making use of other people’s money). The key underlying principles towards SMART Financial Management is mainly focusing on leveraging in order to accelerate your wealth expansion.
The very first step in SMART Financial Management is first to understand your current financial situation. Everyone knows that in the current state of the global economy, the only way to be financially strong (and not even financially free yet) is to invest. In the SMART Financing dictionary, invest means to make or grow your money in a meaningful way via OPM (other people’s money). Gone are the days where we rely on just a 9 to 5 job and to save as much as possible to achieve financial freedom. Why? A few points to ponder.
- Is your salary increment growing more than the actual inflation every year?
- Do you know that there are new types of fees which you seem to be paying more now than before. The amount you pay now vs the year ago seems to be even higher than the yearly inflation.
- There are new types of taxes that we need to pay.
- The ever growing needs of our lifestyle where what once seems to be a “nice to have” item becomes a “necessity” now.
As such, in view of the above, it is very important before we even start any sort of investment journey to make money, we must first learn the basic of financial management. There are 8 key elements in financial management that you need to know.
- a) Income
This is the most important basic item which many may not pay attention on. The single most important key element before we begin on financial management is how we get the funds from. Getting a pay cheque as an employee or running your own business being self-employed are the basic 2 categories of how people obtain their income or funds. The better the ability in getting a higher income surely put you in a better position in managing your finances. The key issue is once you have obtained your income, what should you do to make the most out of it in contributing to your financial freedom roadmap?
- b) Cash Flow
Now that you have allocated your funds structurally, next is how you manage your cash flow. Managing spending and planning ahead to make the most of your income is critical. Cash flow basically refers to an input of funds and an output of funds towards expenses or investment. We will look at it from a property investor’s perspective.
Input of funds
Your basic input of funds are your existing active source of income which you have segmentised into item 1. This covers your basic need to survive but let’s take another step deeper into your investment where at the end of the day, switch your input funds towards 100% on passive earnings.
As you venture to be financially free, you will start off by building your investment portfolio. When you reach a stage you manage your large portfolio of properties, input of funds is highly important. You need to behave like a portfolio manager.
You must ensure you invest smartly into properties which potentially generates upfront input funds to self-sustain
You must ensure that when you venture into such a big journey, you have built a strong rainy day account. Your investment should take care of itself and we are not referring to just an investment taking care of itself but on a portfolio level where there may be some investment which may be able to support other investment so that you can further leverage and grow your financial freedom account.
Output of funds
Output refers to each items which you are required to expense off on a structural basis every month as well as on irregular needs.
It’s all about keeping detailed records. For example, by working out how much you spend in that same period as your input funds – not just on daily expenses but in rent, on subscriptions, for insurance, etc. – you can very quickly paint a picture of what sort of financial trajectory you are on.
You can then adjust accordingly, perhaps cutting back expenses where possible to increase the amount of income that you actually get to keep (that is, that doesn’t go immediately towards expenses).
Truthfully, this can all be done in a well-managed excel sheet or various mobile apps on the go. What gets tracked gets managed.
Though the above paints a picture of having limited funds to budget, there are always ways to overcome this by having a strong, recession proof strategy in managing your input funds to be ready for any unforeseen output of funds. This will not be covered in this article, but we will touch on this in our next issue.
- c) Capital for investment
This is your fund for investment purposes. When you are on the journey towards meeting your financial freedom goal, your capital is basically what you have saved and allocated for investment purposes. This is the single most important drive towards working your way meeting your desired financial freedom target. Whatever extra cash after your structured cash flow builds on your capital funds. This element is critical as it determine how far and fast you can go towards achieving your financial freedom via investment. Remember, opportunities do not come often and opportunities waits for no man. Your goal should work towards moving away from active income towards allowing your passive income to take care of you. Make money work hard for you, not the other way round.
- d) Family Security
A good financial planning involves some degree of security, especially on your family and children. Providing for your family’s financial security is an important part of the financial management process. Insuring your loved ones can provide a peace of mind for you and your loved ones. The other part is to give them a comfortable life and it should be self-sustainable.
- e) Standard of Living
Planning on how much money to set aside for a comfortable living with you and your family. In this element, funds saved over the months should never be re-assigned back to other accounts such as your investment funds. If there is an excess, go out and celebrate once in a while in pampering yourself and your loved ones. Celebration is key as it self-motivates you to continue what you are doing right, right now.
The savings created from good planning can prove beneficial in difficult times. Plan it well and you sail smoothly out of any untoward bad economic hit. No one likes cutting down and living a poorer lifestyle right?
- f) Financial Understanding
Take a pause once a while and reflect back what could have been done better. Apply and execute to continuously improve your process. Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Remember, you are the driver. Be in control. By doing so, it gives you a whole new approach to your budget and improving control over your financial lifestyle.
Financial understanding allows you to leverage your way towards meeting your financial freedom targets. Having the right knowledge in today’s complex banking system allows you to maximize your capabilities to leverage by getting banks to love you, it also prevents you from incurring unnecessary fees or hidden charges which a lot of us get caught by surprise on. In short, it gives you opportunities to make money using other people’s money as well as not paying a hefty cost doing so. Not only do you make money, you save on cost!
- g) Savings
Having emergency cash on hand or stored in high liquidity investments. Though the returns for this is generally lower, a simple rule of 6 months of your current income is required for any emergencies. This prevents any untoward incidences where you are required to borrow and pay hefty interests.
Savings are not only in a form of setting aside funds from your active income, it also involves grabbing occasional banking campaigns, offers and opportunities where you can “borrow” at a low cost to “save” at a higher return. It could be savings from a good savings plans or even to further save interest from paying down / off your higher interest yield liabilities.
The knowledge of settling the liabilities, comes with the understanding of your finances. Every asset acquired must have an exit strategy planned beforehand. The overall process helps build assets that don’t become a burden in the future.
Understanding the 8 key elements of SMART Financial Management is the first critical step before starting your journey in working out a good Financial Management roadmap to achieve Financial Freedom. In a world where assets and investments move quickly and we link our bank accounts to innumerable services and make purchases with the touch of a button, financial management is now getting more and more complicated. As such, to make the most out of your money, understanding the key elements as listed above is critical.
As SMART Financial management covers a full spectrum of strategies, this article will end here being the first part only. We have covered the basic part of Financial Management which is to first understand the 8key elements. We will cover in our next coming issue on Financial Management strategies. Stay Tuned!
