All About Expenditure

This post is a continuation of my previous 2 postings:

1. Financial Planning - Simplified to 4 Variables

2. All About Income

The 2nd posting (All About Income) has also been published at CPF's IM$avvy site.

As the title of this posting suggests, I will now try to give my thoughts on expenditure and how it affects your financial plan. In the first posting, I gave a simplified model that I have always used when I think about financial planning. It basically involves just 4 simple variables of income, expenditure, savings and returns on savings/investments.

The amount a person saves is largely dependent on his income and expenditure. While a person with high income and high expenditure might have low savings, a person with low income and low expenditure might actually have higher savings in absolute dollars and cents!

Take for example a person who earns $1000 per month and spends $950 per month. His savings rate is only $50 per month. On the other hand, a person who earns only $500 per month but spends $400 per month saves $100 per month. That is twice the amount of the supposedly "richer" person.

Expenditure - What Works and What Doesn't

I applaud people who are able to stick by their budgets when it comes to spending money. For me, it is close to impossible. I find it difficult to stick to any sort of budget and also find it too time consuming to calculate every single cent or dollar that I spend.

So how do I control my expenditure? The answer is I don't!

Budgeting doesn't work for me. What works for me is first determining how much I want to save. Experts call this the "Pay Yourself First" technique. After determining how much you want to save each month, you simply set aside that money (be it in a savings plan or separate bank account) whenever you receive your salary.

In this manner, whenever your salary arrives, the amount that you want to save is immediately deducted and goes into a saving plan or another savings account. All that is left in your bank account is the money that you have to spend. Hooray!

Isn't that a better way to view expenditure compared to boring budgeting? (Pardon me if you still use the budgeting method).

So by paying yourself first, you literally get to spend all the remaining money. Of course, the onus is on you to set aside the correct amount of savings that you will like to achieve each month. How much you should save depends on a wide variety of factors and it is too simplistic to give a general rule of thumb.

Current Expenditure versus Future Expenditure

I just coined the two terms above to differentiate between one's current versus future expenditure.

Current expenditure is the monthly expenses one needs to survive each month.

Future expenditure is the expected future expenses that one expects to incur.

As you can see, it is actually quite easy to forecast or predict current expenditure but really difficult to predict future expenditure.

For current expenditure, what you can do is simply add up all the money that flows out of your pocket each month. This would include things like food, grocery, loans, bills, etc, etc. Add all this together and it should give you a rough gauge of your current expenditure.

Future expenditure is a little more tricky especially if you are trying to predict expenditure many years down the road. A simple case of future expenditure could be the case of motor insurance. One usually pays motor or car insurance in one lump sum each year. This might vary from year to year (depending on whether you get into accidents and stuff). If you do not cater enough money for this future expenditure, you might be surprised to see a big drop in your bank account whenever the motor insurance is due.

A more complex case of future expenditure would be your monthly expenditure during your retirement years. As some of us are probably still very far from retirement, it might be difficult for us to gauge how much we might really need. Sometimes, unexpected events like illnesses can occur and might increase our future expenditure. On the whole, experts believe that people need roughly 50 to 60 percent of their last drawn salary during their retirement years. Again, that is hard to predict for the younger folks who just started working as we have no idea what our last drawn salary will be when we retire!

Anyway, to make things really simple, what I do is just make sure that my monthly current expenditure remains roughly the same each year. In this way, I am better able to predict my future expenditure and thus determine the savings rate that I hope to achieve. Savings and expenditure are actually closely linked. If you are not saving much, it is most probably because you are spending too much.

If you can't remember a word that you have just read, just remember this simple message:

Pay Yourself First and Spend the REST!

Why Interest Rates Rise

Interest rates of bonds are rising in the bond market. That means that people are more confident in the economy. Why is there this correlation?

The Federal Reserve Chairman Ben Bernake says he does not expect the US economy to fall back into another recession.

This boosts people's confidence in stocks and thus reduces the demand for safer investment instruments like bonds and treasury notes. In order to attract investors to bonds, the issuers of bonds thus need to raise the interest rate or coupon rate to make it competitive and lucrative enough for investors to invest in them. Otherwise, these investors would rather invest their money in the stock market.

Hope this provides a simple explanation on why interest rates rise when the economy is doing well.

Question:
As interest rates rise, can we also expect the interest rates or deposit rates in our banks to rise?

Are You A "Loser" for Eating Alone?

I saw this short article on Straits Times regarding eating alone.

In Singapore culture, it is deemed embarrassing to be seen eating alone. In fact, I think most people would rather skip their meals if they have to eat alone.

Is it true?

Based on my personal experience, I have certainly felt that way before. In the past, when I was still working in an office, we would all go and eat lunch together at the cafeteria nearby. Sometimes, due to work committments, my usual lunch kakis would be out of office and I was left alone. It was really "embarrassing" in a sense to be seen eating alone in the cafeteria where there were many other acquaintances / colleagues around. These are of course the people that you don't usually mix around with because they are from different branches and departments.

Many times, I found that I resorted to packing my lunch and eating at my desk rather than be seen eating alone.

Nowadays, I have overcomed that fear. Perhaps it is because I no longer work in an office. I certainly don't mind eating alone. But there is still that nagging fear that I might meet someone I know and it might be an "embarrassing" situation.

Do you dare to eat alone?

What Happened to Michael Fay?

I read with interest the news on a Swiss man who has been charged with vandalising the MRT trains at the train depot in Singapore. 33 year old Oliver Fricker has been released on a bail of $100,000 even though his passport is still impounded. His accomplice who is British is apparently already out of Singapore.

This reminded me of the Michael Fay incident back in 1994 where there was this whole big hoo haa when Singapore decided to cane a 18 year old American (who was reportedly suffering from ADHD) after he vandalised cars and stole road signs.

So what happened to Michael Fay?

After much pleading from the US, Singapore still proceeded to cane him at Queenstown Remand Prison. President Ong Teng Cheong however reduced the number of strokes of cane from 6 to 4. Still, the United States media had a field day thrashing Singapore's supposedly draconian laws, almost labelling us as a repressive state for scarring a poor boy for non-violent act.

When he was released from prison, Michael Fay flew back to the United States to be with his biological father. He had moved to Singapore earlier to join his biological mother and step-dad.

After that, he went on various television interviews and claimed that he was "tortured" and did not actually vandalise any cars. He admitted to stealing road signs but not to vandalism. Subsequently, he was involved in substance abuse and also possession of marijuana. He was also involved in reckless driving and stuff in Florida.

What Will Happen to Fricker?

So if an 18 year old American teenager who supposedly came from a broken family and had ADHD was actually sentenced to jail and given 4 strokes of the cane, what will happen to Fricker?

33 years old isn't exactly young.

Perhaps his punishment might be even more severe. But then we can only wait and see....

Cure Hiccups

I was hicupping the whole of yesterday. It was really irritating.

Knowing that hiccups is caused by too little carbon dioxide (I read it somewhere), I tried to hold my breath, hoping that it will remove my hiccups. But it didn't and so I kept hiccuping.

Then I came across this amazing 30 second cure for hiccups. I totally did not believe it but when I tried it, it worked like magic and my hiccups was gone. This must be the best cure that exist today. Here is how I did it:

Step 1 : Inhale air with your mouth until your lungs are full. Keep the air in there.

Step 2: Start swallowing. It is just the act of swallowing. You don't really have to be swallowing anything. Remember to still keep the air inside your lungs.

Step 3: Inhale some more air even though it is just a wee bit of air since your lungs are still full from step 1 and then do the swallowing thing again (repeat step 2).

Holding your breath alone does not seem to work well. You need to do the swallowing thing. Don't ask me why.

My hiccups was gone in less than 30 seconds just by using this method. This is the best method I have discovered in my 28 years of living! It was so good that I just had to blog about it.

The Fear of Something Specific is More Real than the Fear of Something General

As humans, we fear the specific more than the general.

I stumbled upon this thought while reading Al Gore's "Assault on Reason". In one of the chapters, he gave the example of how people would rather buy air travel insurance that covers specifically terrorist threats compared to just a normal air travel insurance (which by the way, also covers terrorist threats).

Somehow, it seems that people are more afraid when they know the specifics of what they have to be afraid of.

Air travel insurance.... No way... But air travel insurance that covers terrorist attacks...Now, that paints a picture in the mind of the consumer and the fear of this improbable event becomes more real (Remember September 11?).

The fear of something specific - something we can visualise - is often more real than the fear of something general.

That is why we see advertisements about critical illness insurance that mentions specific illnesses like cancer. Critical illness just seems too general and nobody really knows what critical illness means anyway. But highlight the specifics and you sort of create a visual image in the person's head. Let me show you 2 scenarios that helps bring out a person's fear when the specifics are highlighted.

Scenario #1

Insurance agent: Let me show you this plan which gives you coverage for critical illness.

Consumer: I don't think I need insurance. (Thinking in his head: What on Earth is critical illness?? Better not ask.. Later I look stupid)

Scenario #2

Insurance agent: Let me show you this plan which provides coverage against Cancer, Heart Attack, Stroke...

Consumer: Wah... okay..how much does it cost?

The above just highlights two simple scenarios. It could be the same insurance product that is being recommended but when one highlights the specifics (cancer, heart attack, stroke, etc), the fear suddenly becomes real. The insurance agent has painted a picture in the person's mind of a specific scenario that could happen to him in the future.

Funny isn't it? Our mind (and ears) sometimes do play funny tricks on us.

The author is really amused that humans often fear the specifics more than the general even though the general could include the specifics. (Hope that does not confuse you). However, he too finds himself falling into this trap.

4th Cheque from Google's Adsense

I received my 4th cheque from participating in Google's Adsense program.

It is not a lot really but still works out to be some"kopi lui" to keep me motivated to keep on blogging. Since people have been saying that I have been too transparent with my finances, I guess I won't reveal how much I got this time. All I will say is that it is the biggest cheque I have received thus far.

What I like about the cheque is that it seems to be mailed from all the way from the United States. The cheque is green in color and is very different from other personal cheques that I have received. On the cheque, everything is printed out. The best thing of course is the currency exchange rate. With the exchange rate now at 1US$ to 1.4S$, it works out to be quite a neat sum. Enough to eat a good meal =)

And in case you are thinking that this blog is making lots of money, it is not. It is some other site of mine that is actually raking in most of the money. Though I spend lots of time on this site, it still hasn't been that "productive" in that sense of the word.