Beginners advice - part 3

Ok, hopefully by now you have some high level financial goals in mind, along with an understanding of your current financial position. Now its time to pull these together & evaluate where you are in the context of where you'd like to get to:

Step 5)  Evaluate your current position
Contrary to what financial advisers will tell you, i really don't think you need to be (or pay for) a financial adviser to do this. The following points are some things that may be worth considering in assessing how you are doing, turning basic financial information into something a bit more meaningful:

Net Worth:
This is generally defined as assets minus liabilities, ie how much you are worth at any point in time.  This can also be projected forward by adding on the difference between your income & expenses.

Lets say your assets are 2000 and your liabilities are 500. This would result in a net worth of 1500.  Now lets say monthly income less average expenses results in savings of 100. Over a year you'd save around 1200, suggesting your net worth in a year's time may be around 2700.

This is particularly useful to understand if one of your goals is to save a certain amount over a set period of time.

Savings rate:
There are different ways of defining this, but my preferred approach is to think about how much you save each month (after putting aside a tax accrual) as a proportion of total income.  This will become a useful tool to measure the pace at which you expect to grow net worth, and can also be used in setting personal targets to achieve certain goals.

Asset Allocation:
This is the proportion of your assets held in each asset category. This can be as detailed as you like, but i tend to focus on 4 broad categories, being Cash (bank accounts), Pension schemes, Property and other Investments (eg shares).

This is important to understand as it determines the relative riskiness or volatility of your wealth - we'll come back to this point at a later stage. It can also be used to assess the level of income/growth your assets may generate through interest, dividends, capital growth or rent.

Cash buffer:
Take the value of all your readily available cash balances and divide it by your typical monthly expenses. This will give an idea of how many months worth of cash are available for emergencies, for example if you lose your job or get hit with any large unexpected expenses.  I consider this an important metric in understanding short term financial security, and it may be one of your goals to maintain a cash buffer of a certain size, depending on your individual appetite for risk.

There are many other things you could look at, but i consider these to be a good starting point in evaluating your current financial position.  They can also be used as metrics or KPIs to assess progress towards goals or for setting specific targets.

Now we have all this information it is possible to start monitoring and making some decisions...

Beginners advice - part 2

In my first post on this topic, i covered the basic foundations of managing personal finances which are to understand your assets, liabilities, income & expenses.

Before diving into any further detail with this information i think it would be a good idea to step back and think about your financial goals:

Step 4)  Consider your goals
These will be different for every individual, and may be vague (eg financial security), specific (saving up $xxx for a property deposit), long term (retirement planning) or shorter term (eg planning for travel). It could even be as simple as just gaining confidence in how to understand and manage your finances more effectively.

My goals probably cover all these. For example, in the longer term i'd like to get myself into a position where i can have a comfortable (and hopefully early!) retirement. In the medium term i'd like to have financial security and to be able to provide for a family.  In the short term i'd like to make sure i can live comfortably and happily but without going too crazy and jeopardising the success of these longer term goals.

An important point to recognise is that these goals will and do change through life, so whilst it is worth stepping back and giving them some initial thought, the process shouldn't be too rigid.


Once you have an idea of your goals, you can start viewing them together with your current position (assets & liabilities) and your outlook (derived from your income & expenses) to shape the current & future financial decisions needed to achieve these goals.

We'll save more on that for next time...

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....