My short story about the importance of planning finances
Not too far in the distant past, January/February had been stressful months for me in terms of finances. Some of you may be able to relate.
People generally regard the new year as a new beginning with new resolutions. It comes with a twist for me. The dread of having to face the sudden surge in expenses… can be a very bad mental stress.
The sudden surge in my expenses comes down to 2 major items:
- Insurance payments (The big one)
- Property (Depends on circumstances)
(1) Insurance Payments / Premiums
My insurance payments are all on an annual basis (in the spirit of not paying extra credit card charges when it is monthly).
As you can imagine, they all converge and scare the hell out of me in January.
There are 3 insurance that I have – life, health and car. The sum of which takes up over 1 month worth of salary.
Could I reduce my insurance payments? Yes and no… but not the issue here.
(2) Property
I have an investment property that I bought in the year 2015.
Yes… at one of the highest prices in the last few years, which is now terribly depressed. Not to mention, the developer OSK Property, has failed to deliver on its promises and the entire development became worth so much less (if you like to kepoh, you can do so here). PSA: Be careful if you are looking at OSK Property’s properties.
In any case, this property’s rental market is mainly catered to students. They’d mostly stay for a year and then move on, which means I would have to look for new tenants by end/beginning of the year.
The expenses that I would incur when one tenancy ends varies depending on how good the tenant is. Few things come to mind:
- Is the place dirty?
- Any pest issues?
- Did anything break down / disappear?
- Any outstanding bills?
There is also a gap of at least a month in the rental income due to any gap time to find a new tenant and commissions payable to the property agent. This means… I have to take on the full mortgage payment during this gap time.
Calm before the storm
Before…
I generally go through the rest of the year quite well. Every month I live based on my monthly income. I have savings, I have investments, I have spending. Occasionally, splurge on some things like food, shopping and travel.
Then when it comes to January – February, the avalanche comes. Payments for the insurance alone would wipe out that month’s salary. These are on top of the month’s usual expenses. So every year I dip into my savings to cope with the payments.
This would take a toll on my emotional wellbeing as I go into a survival mode and try to ensure that I don’t take out too much from my savings to survive for the month(s).
One day, I decided that I had enough of this mental stress.
What helps?
There are two things that I immediately put in place to combat this.
(1) Full view of finances
This involves sitting down and coming up with my full year’s living expenses. A bird’s-eye view, if you may.
This involves looking at the total annual living expenses (with breakdown, of course) and the spending pattern via previous year’s expenses sheet (Both free templates to download here).
I may not get it 100% right the first time I did it (with a few more surprises), but in time, I managed to get a good grasp of what I need to spend on for the year and, more importantly, when.
I have covered in my other post here about my approach in coming up with my “Annual Living Expenses”.
(2) The bucket system for money
I introduced the bucket system in my life – i.e. splitting up my money into different buckets to cater for different needs. You can use glass jars or real buckets for this, but I use bank accounts as my buckets.
As shared previously in my other post about the better bank accounts in Malaysia, I personally hold 3 types of bank accounts:
- Easy access: My daily expenses for the month
- Buffer: Deposit a calculated fixed amount monthly to cover the annual insurance premiums and other out-of-norm expenses (e.g. shopping, travel, etc)
- Touch-me-not: Monthly deposit for life long savings and emergency fund
This ensures that I am very positively & emotionally ready for the coming avalanches. Knowing that I’m prepared for it gives peace of mind when it does happen.
Ready for the storm
If we know that a storm is coming, we will prepare for it.
This is the same concept.
The biggest thing the transformation did for me is to give me a peace of mind. I am now ready for these big items because I have a bucket ready for it.
This is my journey of improving on my own financial planning. #Zen
If you are facing the same, feel free to adopt this approach and I hope it makes a difference for you too.
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