Wednesday, 30 October 2013

Beginners advice - part 1

A friend of mine recently mentioned they were not very familiar with the world of managing personal finances & investments.  It got me thinking as to what i would recommend as a few simple steps for someone looking to start out from the beginning in building their knowledge & skills in this area.

This is what i've come up with so far, and i'll look to develop this over a series of posts:

Step 1)  Understand your starting point.
I think an important first step is to assess your current financial position. This can be done by having one central record (be it an excel spreadsheet, online tool, or paper & pen!) that logs & tracks the value of all assets & liabilities. Assets should include all bank accounts, investments, pension schemes, property. It can also include personal possessions, but i would only recommend including the latter if they add up to a big number and could/would be easily sold.  Liabilities should include any debt such as loans, mortgages & credit cards.  If based in HK you can also go a step further and estimate how much salaries tax you are likely to owe and include this as a liability.

Step 2)  Understand your income & expenses
For most people on a regular salary, it is relatively easy to understand income as it is usually consistent & predictable. Expenses tend to be harder as they are often less consistent & depend on a lot of different factors (eg one-off treats, holidays).  It may be easiest to focus first on necessary expenses (such as rent & bills) and then look back over a few months to work out an average for discretionary expenses.

Step 3)  Pull this all together
Once you build an understanding of your typical income & expenses, the next logical step is to bring these together in a simple budget or plan.  This will give an idea of how much (hopefully!) spare cash you have left over each month and how regular or consistent this is likely to be.

These first 3 steps give a solid platform to then start planning ahead, understanding your goals & objectives, and managing your finances.  More to follow....

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