It pays to steer your hard-earned money in the right direction so that it works for you. Follow these three simple guidelines that you will put you on top of the savings game.
Create a Personal Cash-flow Statement
A personal cash-flow statement provides a point-in-time snapshot of what income comes into your household from your job and/or any other sources, as well as what you’re spending and saving. You’ll need the following pieces of data to complete it. Most recent paycheck, Income from other sources – such as rent or a pension and monthly investments/savings amounts, Statements for recurrent debt, such as a home loan. Also record of fixed and discretionary expenses. Subtract your expenses from your income to arrive at your monthly cash-flow surplus or deficit. If you’re in the red from a monthly cash-flow standpoint, you’ll need to adjust your spending.
Check your Savings Ratio
Check your savings rate. Saving 10% of income is the old rule of thumb, but in many cases that won’t be enough; 15% or 20% is a better target, especially if you’re a higher-income earner. Don’t blindly fall for the 10% rule; take the time to calibrate your savings rates to factor in your own situations: your income, how much you have managed to save so far, your proximity to reaching retirement financial goal, and the return you can expect to earn on your investments.
Identify and Prioritise your Financial Goals
Take a close look at what financial goals you’d like to achieve, factoring in your wishes as well as what makes sense from a financial/return on investment perspective. List your financial goals–short-, intermediate-, and long-term–and rank from highest to lowest priority. Don’t forget to include debt paydown as a goal, building an emergency fund should also be toward the top of the priority pyramid. Now that you have listed your goals, quantify them.
Because there are so many moving parts to determining cash-flow needs that could last 25 or 30 years or even longer, it is recommend to consult a financial adviser.
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Ajay Singh – Senior Manager, SNMA