After a very successful 2016 for my finances i'll be hoping for more of the same in 2017. In preparing a simple financial plan for 2017 my working assumption for most items will be to expect income and expenses to be broadly consistent with last year.
Regarding income, overall this is expected to be quite flat. Employment income will likely be a little lower, but hopefully property income will hopefully be higher if i can rent out my recent property investment. The big unknown will be if there are further foreign exchange movements, which were a big factor last year, but my working assumption is flat fx rates against current levels.
In expenses, tax and rent are expected to be similar, although my own rental agreement is up for renewal in the summer. Investment property expenses will likely be higher but should hopefully be covered by income. I've put some buffer in general day to day expenses as i've had my eye on a few luxuries for a while now. Travel costs are also a bit of an unknown for now, probably not as high as last year but i've budgeted for a similar number of trips.
Overall, if this goes to plan it should be another year with a savings ratio in the mid 60%s range and net worth growth of 18%. All investment, pension and property values are assumed to be flat, and will no doubt bring some volatility given all the political and market issues unfolding around the world...
Showing posts with label Budgeting. Show all posts
Showing posts with label Budgeting. Show all posts
Monday, 30 January 2017
Sunday, 25 January 2015
2015 Planning
Looking ahead to 2015, i'm hopeful it can be another successful year for my personal finances.
Based on my projections i'm expecting a fairly similar year to 2014 in terms of income & expenses. This would translate to a net worth growth of roughly 15% and a savings rate just over 60%. Whilst employment income is to some extent uncertain, it is comforting to see my passive income (from property investments & cash) continue to grow as my asset base grows.
In expenses, there may be some increases as the rental contract on my current accommodation is due for renewal. In addition, travel and other personal expenses are somewhat uncertain at this stage, although nothing major is planned.
Regarding my investment outlook, i'm conscious of the recent rallies across many equities markets, which may slow down the rate of growth in my investment portfolio. However, i'll be looking to take advantage of any market corrections.
In addition, it is looking more likely that i'll make a further property investment during the year, as i look to manage down my cash reserves, which are currently running at around 34% of total assets.
Away from personal finances, i'll also be continuing my long standing objective of improving fitness, which has proved less successful than my financial objectives in recent years!
Wednesday, 26 March 2014
Lump sum income
I've been lucky enough to receive a reasonably large cash lump sum from my employment.
Whilst this is always welcome, it does compound my existing issues of a growing cash pile and a lack of risk appetite to invest material amounts in the financial markets given current volatility & valuations.
Whilst i do have a few luxury purchases in mind and have made a couple of initial investments, i am likely to sit on the cash pile for a while until i have a clearer strategy what to do with it.
My overall cash yield remains above 2%, which gives me some comfort that i'm not losing too much to inflation in the meantime.
Whilst this is always welcome, it does compound my existing issues of a growing cash pile and a lack of risk appetite to invest material amounts in the financial markets given current volatility & valuations.
Whilst i do have a few luxury purchases in mind and have made a couple of initial investments, i am likely to sit on the cash pile for a while until i have a clearer strategy what to do with it.
My overall cash yield remains above 2%, which gives me some comfort that i'm not losing too much to inflation in the meantime.
Saturday, 9 November 2013
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...
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...
Friday, 1 November 2013
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...
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...
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....
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....
Thursday, 17 October 2013
Managing assets in multiple currencies
One of the challenges many expats face in managing personal finances is having assets denominated in different currencies. This adds both complexity to monitoring, and risk to managing the assets.
If we take monitoring first, i'll summarise some of the challenges i've encountered and my approach to dealing with these.
The first choice i faced was which currency to monitor assets in, ie. whether to translate everything to a preferred/primary currency, monitor everything in its own currency, or monitor all assets in multiple currencies (or a combination of these). My approach is to track each asset in its underlying currency, and then translate the total to my primary currency, but also to then track this total in the other major currencies used. I track the total in multiple currencies mainly because i'm not sure yet where i'll be based later in life.
A second issue encountered was which fx rates to use, and how frequently to update these. This is perhaps a sign of my limitations in microsoft excel, but i have found changing fx rates adds a lot of complexity to the monitoring of assets in multiple currencies, with current income being effected, along with the need to re-translate the existing asset base. My preferred approach is therefore to minimise changes in fx rates by taking a 'benchmark' or recent historical average rate, and sticking with this as long as possible ignoring short term fluctuations. I then only change fx rates when they break out of a recent range and move away from my benchmark rates. Whilst this doesn't remove the complexities, it does reduce the frequency of facing these complexities! In order to minimise error, i've tried to build in checks to make sure everything still adds up after a change, and to also include fields to isolate the impact of fx changes, which helps in understanding & managing the risk.
In terms of fx risk management, whilst i don't have a clearly defined strategy, my approach over the last couple of years has been to translate as much as possible into my original home currency. This is partly as i have so far assumed there is a good chance i'll live there again in the future, and partly because my original home currency has been closer towards its historic weak point against other major currencies, making it cheap & attractive to buy. I have also found a greater choice & easier access to assets in this currency to invest in, to manage my finances.
However, recently i have begun thinking that there is less certainty where i will be based in the long term. It would therefore be prudent to have a greater balance to the currency mix of my assets, giving greater flexibility for the future and helping to hedge fx risk through diversification. This is likely to result in a gradual re-balancing of my currency exposure going forward, which may also have knock on implications for my overall asset allocation.
If there are any significant fx movements going forward, i may look to opportunistically take advantage of these, but this is only likely to be between currencies that i currently have or am likely to use. I'm not particularly interested in speculating in a wider range of currencies, and my focus is more on risk management rather than seeing currencies themselves as an investment tool.
If we take monitoring first, i'll summarise some of the challenges i've encountered and my approach to dealing with these.
The first choice i faced was which currency to monitor assets in, ie. whether to translate everything to a preferred/primary currency, monitor everything in its own currency, or monitor all assets in multiple currencies (or a combination of these). My approach is to track each asset in its underlying currency, and then translate the total to my primary currency, but also to then track this total in the other major currencies used. I track the total in multiple currencies mainly because i'm not sure yet where i'll be based later in life.
A second issue encountered was which fx rates to use, and how frequently to update these. This is perhaps a sign of my limitations in microsoft excel, but i have found changing fx rates adds a lot of complexity to the monitoring of assets in multiple currencies, with current income being effected, along with the need to re-translate the existing asset base. My preferred approach is therefore to minimise changes in fx rates by taking a 'benchmark' or recent historical average rate, and sticking with this as long as possible ignoring short term fluctuations. I then only change fx rates when they break out of a recent range and move away from my benchmark rates. Whilst this doesn't remove the complexities, it does reduce the frequency of facing these complexities! In order to minimise error, i've tried to build in checks to make sure everything still adds up after a change, and to also include fields to isolate the impact of fx changes, which helps in understanding & managing the risk.
In terms of fx risk management, whilst i don't have a clearly defined strategy, my approach over the last couple of years has been to translate as much as possible into my original home currency. This is partly as i have so far assumed there is a good chance i'll live there again in the future, and partly because my original home currency has been closer towards its historic weak point against other major currencies, making it cheap & attractive to buy. I have also found a greater choice & easier access to assets in this currency to invest in, to manage my finances.
However, recently i have begun thinking that there is less certainty where i will be based in the long term. It would therefore be prudent to have a greater balance to the currency mix of my assets, giving greater flexibility for the future and helping to hedge fx risk through diversification. This is likely to result in a gradual re-balancing of my currency exposure going forward, which may also have knock on implications for my overall asset allocation.
If there are any significant fx movements going forward, i may look to opportunistically take advantage of these, but this is only likely to be between currencies that i currently have or am likely to use. I'm not particularly interested in speculating in a wider range of currencies, and my focus is more on risk management rather than seeing currencies themselves as an investment tool.
Thursday, 3 October 2013
2014 Financial Planning
As we have entered the 4th quarter i've done a quick first draft of my 2014 financial plan.
Whilst i already have a very high level forecast for the next 15 or so years, i always try to refine the closest year to better plan and manage cash flows, expenses and investments. It also helps to set objectives & targets, focusing the mind on short term financial discipline to reach a longer term goal.
I'm expecting to finish 2013 with an approximate annual net worth growth of around 35% and a savings rate around 70%, which is well above what i planned for, but also includes a couple of one-off gains that won't recur. For reference my 2013 plan had net worth growth of 21% and a savings rate of 63%.
For 2014 i'm assuming flat regular income without the one-offs. This is fairly conservative but that's how i prefer to plan. I'm assuming higher expenses based on experience from this year to date, which are running around 10% ahead of plan. This is partly a timing issue of when HK income tax payments are due, but also higher underlying expenses, in particular entertainment, eating out etc which are areas i've decided to allow some more luxury into my lifestyle! There are no large one off expenses expected next year.
The initial 2014 plan indicates net worth growth of around 15% with a savings rate of around 60%. I think this is fairly realistic, and i would be happy to achieve these figures. Net worth growth as a percentage should continue to decline as the base grows each year, and a key long term financial goal is to maintain a savings rate above 50%. My approach to calculating a savings rate is to include tax in expenses and compare total expenses to gross income. The percentage would be higher if tax was netted against income first.
I'll probably give this some more thought over the next few months and make some refinements, but the first cut looks good so far!
Whilst i already have a very high level forecast for the next 15 or so years, i always try to refine the closest year to better plan and manage cash flows, expenses and investments. It also helps to set objectives & targets, focusing the mind on short term financial discipline to reach a longer term goal.
I'm expecting to finish 2013 with an approximate annual net worth growth of around 35% and a savings rate around 70%, which is well above what i planned for, but also includes a couple of one-off gains that won't recur. For reference my 2013 plan had net worth growth of 21% and a savings rate of 63%.
For 2014 i'm assuming flat regular income without the one-offs. This is fairly conservative but that's how i prefer to plan. I'm assuming higher expenses based on experience from this year to date, which are running around 10% ahead of plan. This is partly a timing issue of when HK income tax payments are due, but also higher underlying expenses, in particular entertainment, eating out etc which are areas i've decided to allow some more luxury into my lifestyle! There are no large one off expenses expected next year.
The initial 2014 plan indicates net worth growth of around 15% with a savings rate of around 60%. I think this is fairly realistic, and i would be happy to achieve these figures. Net worth growth as a percentage should continue to decline as the base grows each year, and a key long term financial goal is to maintain a savings rate above 50%. My approach to calculating a savings rate is to include tax in expenses and compare total expenses to gross income. The percentage would be higher if tax was netted against income first.
I'll probably give this some more thought over the next few months and make some refinements, but the first cut looks good so far!
Tuesday, 30 July 2013
Cash update
Back in April i provided a summary of my approach to managing cash balances. I view this very much as a continual work in progress and i'm always making small changes as competitive savings rates come and go.
I've made a number of changes in the past couple of weeks, largely in response to a couple of accounts maturing and some other rates being reduced. In summary, these have been to move cash from maturing accounts into new longer tenor fixed term accounts, increasing the average maturity profile of my cash balances.
These can be summarised below:
April 2013:
July 2013:
The net result is an increase in yield from around 2% to 2.3%, with minimal impact on the amount of cash instantly accessible. I've also given more certainty to the yield, locking in fixed rates on the assumption that the Fed, BoE and ECB are unlikely to raise interest rates for another year or so. Whilst this does introduce some opportunity cost or re-investment risk, i'm prepared to take this on to obtain a higher yield in the short term.
I've made a number of changes in the past couple of weeks, largely in response to a couple of accounts maturing and some other rates being reduced. In summary, these have been to move cash from maturing accounts into new longer tenor fixed term accounts, increasing the average maturity profile of my cash balances.
These can be summarised below:
April 2013:
| On demand | <3mths | <1yr | <2yrs | >2yrs | Total | ||
| % of cash | 49% | 19% | 3% | 23% | 6% | 100% | |
| % of assets | 18% | 7% | 1% | 8% | 2% | 36% |
July 2013:
| On demand | <3mths | <1yr | <2yrs | >2yrs | Total | ||
| % of cash | 46% | 3% | 7% | 36% | 8% | 100% | |
| % of assets | 16% | 1% | 2% | 13% | 3% | 35% |
The net result is an increase in yield from around 2% to 2.3%, with minimal impact on the amount of cash instantly accessible. I've also given more certainty to the yield, locking in fixed rates on the assumption that the Fed, BoE and ECB are unlikely to raise interest rates for another year or so. Whilst this does introduce some opportunity cost or re-investment risk, i'm prepared to take this on to obtain a higher yield in the short term.
Monday, 8 July 2013
Property value update
I've recently noticed the valuation of my rental property has increased a lot since the last time i looked.
As a recap, i periodically update the value of my rental property in my net worth calculation, based on a conservative interpretation of a local valuations / sales. I've decided to include this at market value in my net worth and forecasting by nature of the property serving more as an income generating investment rather than a primary residence.
The last update was in August 2012, and since then, the market value seems to have increased between 5-10%.
As such, i'll be increasing the value in my records by 4% this month. I've chosen to use a slightly lagging value with infrequent updates as (a) i prefer not to make lots of up & down changes and instead want to slowly reflect a longer term trend, and (b) i have no immediate plans to sell so the exact monthly value is less of a concern.
As a recap, i periodically update the value of my rental property in my net worth calculation, based on a conservative interpretation of a local valuations / sales. I've decided to include this at market value in my net worth and forecasting by nature of the property serving more as an income generating investment rather than a primary residence.
The last update was in August 2012, and since then, the market value seems to have increased between 5-10%.
As such, i'll be increasing the value in my records by 4% this month. I've chosen to use a slightly lagging value with infrequent updates as (a) i prefer not to make lots of up & down changes and instead want to slowly reflect a longer term trend, and (b) i have no immediate plans to sell so the exact monthly value is less of a concern.
Sunday, 9 June 2013
Unplanned costs of moving / not moving home
Having recently renewed my tenancy agreement, i've been hit with a couple of costs that i should have budgeted for, but didn't.
These included agency handling fees & stamp duty for the contract renewal, a top up to the rental deposit due to the increase in rent, and the purchase of some new furniture items that i'd been holding back on given the uncertainty of whether or not i would be moving.
However, it did make me realise that this was a clear hole in my budget & longer term cash flow plans, as costs would arise every couple of years regardless of whether i move or not. For instance, by not moving, the costs above would still recur to a greater or lesser extent every couple of years. If i did move, the costs would probably include all the above (but higher), and in addition the costs associated with physically moving.
I'll therefore add an estimate for this item to my long term cashflow forecasts and annual budgets. Whilst it didn't make a material dent in my current year plans, the costs would add up over a long time horizon.
These included agency handling fees & stamp duty for the contract renewal, a top up to the rental deposit due to the increase in rent, and the purchase of some new furniture items that i'd been holding back on given the uncertainty of whether or not i would be moving.
However, it did make me realise that this was a clear hole in my budget & longer term cash flow plans, as costs would arise every couple of years regardless of whether i move or not. For instance, by not moving, the costs above would still recur to a greater or lesser extent every couple of years. If i did move, the costs would probably include all the above (but higher), and in addition the costs associated with physically moving.
I'll therefore add an estimate for this item to my long term cashflow forecasts and annual budgets. Whilst it didn't make a material dent in my current year plans, the costs would add up over a long time horizon.
Thursday, 30 May 2013
Tenancy renewal update
I mentioned a couple of weeks ago that i'd started the process of negotiating a new rental contract for where i'm living in HK.
After a couple of offers & counter-offers we have settled on an increase of around 4.7%, which i'm quite happy about for a couple of reasons:
Firstly, it means i don't have to move - i hate moving!;
And secondly, this means that over a 4 year period (the last 2 years and the next 2 years) a 4.7% increase is actually very reasonable and well below the local inflation rate over the time period in question.
This also gives certainty to an important component of my expenses, and the increase will not have a material impact on my savings rate.
After a couple of offers & counter-offers we have settled on an increase of around 4.7%, which i'm quite happy about for a couple of reasons:
Firstly, it means i don't have to move - i hate moving!;
And secondly, this means that over a 4 year period (the last 2 years and the next 2 years) a 4.7% increase is actually very reasonable and well below the local inflation rate over the time period in question.
This also gives certainty to an important component of my expenses, and the increase will not have a material impact on my savings rate.
Saturday, 11 May 2013
Expenses review - six months on
Having built up around six months of detailed expense data i'm now in a better position to understand and evaluate my expenses.
Here's a summary of my findings:
Overall: total expenses (incl rent and tax) have been tracking under 40% of gross regular income, resulting in a consistently high savings over 60%.
Tax: whilst being a big number in absolute terms, it is considerably lower than it would be in many countries, resulting in a material net worth benefit over the last few years.
Rental expense: a large item and so far the most stable, although this is currently under review and is likely to change in the near future. I'm not really willing to spend much more than i do now.
Bills: fairly consistent and relatively low, especially utilities. I've also learned the hard way not to use data roaming overseas!
Travel: low so far, as i haven't been able to take much holiday this year due to work commitments. I have budgeted a large amount for this item and intend to make a few trips later in the year.
Food & drink: this is an area i know i could cut back on if i wanted to. Its a little higher than budgeted at the moment, but not enough to be of concern.
Entertainment & luxuries: despite a few sporting events, concerts & gadgets, this is still under budget.
Other items: gym membership is budgeted and property costs have been low.
In summary, i'm broadly in line with what is quite a conservative spending budget, with a few items over and a few items under. I'm also tracking the cumulative amount under/over through the year, with the intention of using any under-spend to top up my luxuries budget as required.
Here's a summary of my findings:
Overall: total expenses (incl rent and tax) have been tracking under 40% of gross regular income, resulting in a consistently high savings over 60%.
Tax: whilst being a big number in absolute terms, it is considerably lower than it would be in many countries, resulting in a material net worth benefit over the last few years.
Rental expense: a large item and so far the most stable, although this is currently under review and is likely to change in the near future. I'm not really willing to spend much more than i do now.
Bills: fairly consistent and relatively low, especially utilities. I've also learned the hard way not to use data roaming overseas!
Travel: low so far, as i haven't been able to take much holiday this year due to work commitments. I have budgeted a large amount for this item and intend to make a few trips later in the year.
Food & drink: this is an area i know i could cut back on if i wanted to. Its a little higher than budgeted at the moment, but not enough to be of concern.
Entertainment & luxuries: despite a few sporting events, concerts & gadgets, this is still under budget.
Other items: gym membership is budgeted and property costs have been low.
In summary, i'm broadly in line with what is quite a conservative spending budget, with a few items over and a few items under. I'm also tracking the cumulative amount under/over through the year, with the intention of using any under-spend to top up my luxuries budget as required.
Wednesday, 8 May 2013
Tenancy renewal (this time for me)
I'm currently renting an apartment in HK. Whilst i don't enjoy giving away my money to pay someone else's mortgage, i currently have little choice given (a) the relative cost of property here, (b) the new tax measures in place to deter non-residents from buying property, and (c) my lack of a long term plan of how long i'll be based here.
Rental contracts in HK are typically for 2 years, with the ability to exit after around 1 year. I've been in the same apartment for close to 2 years now, and whilst i'm reasonably comfortable with the amount of rent i currently pay, my contract is close to ending.
I'd like to stay where i am (its a good location and i hate moving), and i've made initial contract with the landlord to negotiate a new tenancy agreement. I'm waiting for feedback on the new rental level to be proposed by the landlord.
I've heard many stories of extortionate increases being requested, so i'm expecting the worst and i'm prepared to move if the proposal is too high. The one thing in my favour is that there has recently been a shift in market sentiment for HK property, which will hopefully keep the negotiations to a sensible level.
To be continued...
Rental contracts in HK are typically for 2 years, with the ability to exit after around 1 year. I've been in the same apartment for close to 2 years now, and whilst i'm reasonably comfortable with the amount of rent i currently pay, my contract is close to ending.
I'd like to stay where i am (its a good location and i hate moving), and i've made initial contract with the landlord to negotiate a new tenancy agreement. I'm waiting for feedback on the new rental level to be proposed by the landlord.
I've heard many stories of extortionate increases being requested, so i'm expecting the worst and i'm prepared to move if the proposal is too high. The one thing in my favour is that there has recently been a shift in market sentiment for HK property, which will hopefully keep the negotiations to a sensible level.
To be continued...
Monday, 22 April 2013
Cash profile
I've spent a lot of time over the past few weeks organising and managing my cash balances. As the balance has grown to a significant proportion of my total assets (currently around 36%) and isn't likely to reduce significantly in the short term, i consider it important to manage this as closely as i would manage my other investments.
There are a number of parameters i consider in managing my cash. These include:
Security:
My preference is to use reputable financial institutions, with balances covered by deposit guarantee schemes. The only exception i have made to this is a relatively small experimental placement in a peer to peer lending site, which offers a much greater return for the increased risk to capital.
Accessibility:
The ease of transferring funds in and out of accounts. This is important being an expat with funds in different locations. My preference is to do as much as possible online. I also need to be aware of the terms and conditions of existing and new accounts, which can differ by country and institution.
Maturity:
This is a balance between funds being available on demand or after a fixed term, based on when i would like the ability to access the cash. The current maturity profile of my cash balances is summarised below:
I am currently keeping a significant amount of cash in instant access accounts should better investment opportunities arise. I'm generally keeping new time deposits to a maximum of 2 years given the current low rate environment, as there is little advantage to locking in low rates for excessive time periods.
Currency/Country:
Again, this requires more active management as an expat. I generally limit myself to placing cash in countries that i either currently live, have lived in the past or am likely to live in the future, in order to minimise my global tax footprint. In terms of currencies, this is primarily based on currencies that i have active cashflows in, or the currency of the country where the funds are placed. I generally do not make speculative investments in currencies, apart from the occasional RMB time deposit which has recently offered the opportunity for both enhanced yield and capital appreciation.
Yield:
This is generally a trade-off with the other parameters, with higher rates often available on longer term fixed rate deposits or in certain currencies. Following some recent maintenance and a few new accounts, my average yield on cash is up to around 2%. I have been trying to minimise cash held in HKD given (a) the extremely low interest rates available, and (b) my positive HKD cash flow generation from employment.
There are a number of parameters i consider in managing my cash. These include:
Security:
My preference is to use reputable financial institutions, with balances covered by deposit guarantee schemes. The only exception i have made to this is a relatively small experimental placement in a peer to peer lending site, which offers a much greater return for the increased risk to capital.
Accessibility:
The ease of transferring funds in and out of accounts. This is important being an expat with funds in different locations. My preference is to do as much as possible online. I also need to be aware of the terms and conditions of existing and new accounts, which can differ by country and institution.
Maturity:
This is a balance between funds being available on demand or after a fixed term, based on when i would like the ability to access the cash. The current maturity profile of my cash balances is summarised below:
| On demand | <3mths | <1yr | <2yrs | >2yrs | Total | ||
| % of cash | 49% | 19% | 3% | 23% | 6% | 100% | |
| % of assets | 18% | 7% | 1% | 8% | 2% | 36% |
I am currently keeping a significant amount of cash in instant access accounts should better investment opportunities arise. I'm generally keeping new time deposits to a maximum of 2 years given the current low rate environment, as there is little advantage to locking in low rates for excessive time periods.
Currency/Country:
Again, this requires more active management as an expat. I generally limit myself to placing cash in countries that i either currently live, have lived in the past or am likely to live in the future, in order to minimise my global tax footprint. In terms of currencies, this is primarily based on currencies that i have active cashflows in, or the currency of the country where the funds are placed. I generally do not make speculative investments in currencies, apart from the occasional RMB time deposit which has recently offered the opportunity for both enhanced yield and capital appreciation.
Yield:
This is generally a trade-off with the other parameters, with higher rates often available on longer term fixed rate deposits or in certain currencies. Following some recent maintenance and a few new accounts, my average yield on cash is up to around 2%. I have been trying to minimise cash held in HKD given (a) the extremely low interest rates available, and (b) my positive HKD cash flow generation from employment.
Saturday, 13 April 2013
Another cash boost
Earlier this month i received a long expected share of some family inheritance, with the final amount being larger than originally expected. This was all in cash.
Although i've made a number of investments in the past 2 weeks, the recent cash inflows have seen my cash balances increase to around 36% of total assets, well in excess of my 20% target.
Whilst i will try to manage this balance down, i'm not going to rush it. I'm managing to average about a 2% return on my cash in the meantime and more than half of it is available at short notice for investment opportunities or emergencies.
A key point to consider is that if i do nothing, this balance will continue to rise with a positive savings rate each month, potentially drifting up to 40% later in the year. At these levels, larger investments such as property become a much more viable option.
Although i've made a number of investments in the past 2 weeks, the recent cash inflows have seen my cash balances increase to around 36% of total assets, well in excess of my 20% target.
Whilst i will try to manage this balance down, i'm not going to rush it. I'm managing to average about a 2% return on my cash in the meantime and more than half of it is available at short notice for investment opportunities or emergencies.
A key point to consider is that if i do nothing, this balance will continue to rise with a positive savings rate each month, potentially drifting up to 40% later in the year. At these levels, larger investments such as property become a much more viable option.
Friday, 1 March 2013
Expecting a few one-offs
March is likely to be a fairly unique month for my finances, with a couple of one-off cash inflows expected.
Firstly i expect some time around the middle of the month to receive a share of some family inheritance. Whilst only representing a few months expenses, it will add to my cash reserves and would be readily available for investment.
Towards the end of the month i should also receive a lump sum related to my employment. Again, this will be in the form of cash and therefore readily available for investment.
I expect the combination of these to push me well in excess of 30% of my assets held in cash, much higher than my 20% medium term target.
My initial thoughts are to hold a reasonable proportion in easily accessible accounts both for emergencies and to be ready for investment opportunities. However, given the size of my buffer and positive monthly savings rate, i'll probably tie some of it up in time deposits to get a better return. I may also add to my holidays/luxuries budget for the year.
Whilst its a nice dilemma to have, i really do need to give some more thought to how best to manage my cash reserves, and in particular finding a balance between ease of access and maximising return.
Firstly i expect some time around the middle of the month to receive a share of some family inheritance. Whilst only representing a few months expenses, it will add to my cash reserves and would be readily available for investment.
Towards the end of the month i should also receive a lump sum related to my employment. Again, this will be in the form of cash and therefore readily available for investment.
I expect the combination of these to push me well in excess of 30% of my assets held in cash, much higher than my 20% medium term target.
My initial thoughts are to hold a reasonable proportion in easily accessible accounts both for emergencies and to be ready for investment opportunities. However, given the size of my buffer and positive monthly savings rate, i'll probably tie some of it up in time deposits to get a better return. I may also add to my holidays/luxuries budget for the year.
Whilst its a nice dilemma to have, i really do need to give some more thought to how best to manage my cash reserves, and in particular finding a balance between ease of access and maximising return.
Friday, 8 February 2013
Holidays
One of the benefits of living in Hong Kong is the easy access to a large range of great holiday options. Although i've made quite a few short trips around Asia in the last couple of years, i've still barely scratched the surface on the places i'd like to see.
Holidays and travel is one area of expenditure i'm quite happy to increase. I made the mistake last year of not really planning anything, and ended up drifting through the year only managing to squeeze in a few long weekends & family visits.
This year i'm going to make a conscious effort to plan ahead and organise some trips to new places throughout the year. I'm expecting a busy year with work and probably won't be able to take a prolonged break, but will certainly be able to take at least a week each quarter, along with a few odd days here and there.
I've budgeted for 4 trips this year, and i'm determined not to under-spend on this part of my budget again!
Holidays and travel is one area of expenditure i'm quite happy to increase. I made the mistake last year of not really planning anything, and ended up drifting through the year only managing to squeeze in a few long weekends & family visits.
This year i'm going to make a conscious effort to plan ahead and organise some trips to new places throughout the year. I'm expecting a busy year with work and probably won't be able to take a prolonged break, but will certainly be able to take at least a week each quarter, along with a few odd days here and there.
I've budgeted for 4 trips this year, and i'm determined not to under-spend on this part of my budget again!
Monday, 28 January 2013
Unexpected mail
I received a couple of unexpected but welcome letters this month. Two of my savings account providers contacted me to let me know they would be raising the interest rates on some of my accounts. Its the first time (certainly post 2008) i can remember being contacted in such a way with the offer of an improvement in the rates on existing accounts, with no strings attached or new purchases required. The two institutions are unconnected.
Given the lack of central bank / market moves, i can only imagine these are motivated by local competitive forces. I believe one is related to a product re-launch, the other appears to be more of a short term goodwill gesture.
This was a timely surprise following my recent post Falling rates, i wonder if they read my blog! Coincidentally i had been planning to move funds away from both accounts to better offers, so i'm assuming their marketing teams are monitoring competitor rates as closely as me and recognised the threat of losing funds.
Given the lack of central bank / market moves, i can only imagine these are motivated by local competitive forces. I believe one is related to a product re-launch, the other appears to be more of a short term goodwill gesture.
This was a timely surprise following my recent post Falling rates, i wonder if they read my blog! Coincidentally i had been planning to move funds away from both accounts to better offers, so i'm assuming their marketing teams are monitoring competitor rates as closely as me and recognised the threat of losing funds.
Wednesday, 16 January 2013
Forecasting
Something i probably devote as much time to as the basic managing & recording of my monthly finances is forecasting & planning, and i find this has a variety of uses.
Whilst this is inherently more judgmental and speculative than the actual reporting of past events, it allows me to project what my financial position is likely to be in the coming months or years.
Looking a few months ahead (for example the months of 2013) is particularly useful in managing the timing of cashflows, such as one off income/expenses or investments. It also helps the goal setting process & performance evaluation, in determining a baseline ie. estimating my financial position at the end of the year if nothing significant or out of the ordinary occurs in the coming months. Looking further into the future can help to plan for major life events or expenses, or even potential retirement scenarios.
Whilst it is generally easier to forecast a short distance ahead, i believe the key to this process is determining appropriate assumptions upon which to base the projections. Short term (for example within 1 year) assumptions are generally straightforward as income streams may have greater certainty, and expenses are either likely to be recurring or predetermined such as holidays. Long term assumptions should ideally take into account the impact of inflation (certainly on expenses, and hopefully on income!) and investment returns.
Generally i like to keep my assumptions as simple as possible. Given the inherent uncertainties in looking ahead, i see little value in over-engineering the process and losing sight of the key messages and purpose. For 2013 i've projected income & expenses to be broadly similar to 2012, with conservative investment returns.
My long term forecasting assumptions are very simplistic, really to keep my workings as simple as possible. For example, rather than trying to inflate both my income & expenses, i leave them both flat, effectively assuming wage inflation would offset expense inflation. As my income generally exceeds expenses, i believe this generates a fairly conservative result, and is also easier to interpret (everything can be read in today's prices). I often consider attempting to inflate these up and probably will do in the future, but for now i'm quite happy running a simple model. This is also because my primary focus for now is in managing cashflows and investments over the next year or so.
I'd be interested to hear if anyone takes similar or different approaches to forecasting, and what assumptions are used.
Whilst this is inherently more judgmental and speculative than the actual reporting of past events, it allows me to project what my financial position is likely to be in the coming months or years.
Looking a few months ahead (for example the months of 2013) is particularly useful in managing the timing of cashflows, such as one off income/expenses or investments. It also helps the goal setting process & performance evaluation, in determining a baseline ie. estimating my financial position at the end of the year if nothing significant or out of the ordinary occurs in the coming months. Looking further into the future can help to plan for major life events or expenses, or even potential retirement scenarios.
Whilst it is generally easier to forecast a short distance ahead, i believe the key to this process is determining appropriate assumptions upon which to base the projections. Short term (for example within 1 year) assumptions are generally straightforward as income streams may have greater certainty, and expenses are either likely to be recurring or predetermined such as holidays. Long term assumptions should ideally take into account the impact of inflation (certainly on expenses, and hopefully on income!) and investment returns.
Generally i like to keep my assumptions as simple as possible. Given the inherent uncertainties in looking ahead, i see little value in over-engineering the process and losing sight of the key messages and purpose. For 2013 i've projected income & expenses to be broadly similar to 2012, with conservative investment returns.
My long term forecasting assumptions are very simplistic, really to keep my workings as simple as possible. For example, rather than trying to inflate both my income & expenses, i leave them both flat, effectively assuming wage inflation would offset expense inflation. As my income generally exceeds expenses, i believe this generates a fairly conservative result, and is also easier to interpret (everything can be read in today's prices). I often consider attempting to inflate these up and probably will do in the future, but for now i'm quite happy running a simple model. This is also because my primary focus for now is in managing cashflows and investments over the next year or so.
I'd be interested to hear if anyone takes similar or different approaches to forecasting, and what assumptions are used.
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