Back to Basic

After the article about money matters but we fail the test, I thought it's a good idea to go back to basic.

Below are the key question everyone should consider:

1) How much money do I need for my emergency fund?
It's easy to dismiss the idea that we all need an emergency fund. "Nothing bad can happen to nice people like you and me", right? But the fact is we really don't know what will happen tomorrow. It may not be an accident (typically what a financial planner tells you). It could be a family member becoming sick and you need to stop work to take care of him/her. Or simply, you want to know that you can quit your job right now, knowing you have enough to get by while you are looking for a new job.

In terms of amount, how much you need will depend on your circumstances. If you have mortgage or rent obligations, you will need to set aside more. Personally, I prefer to put aside enough money to get me through 6 months of obligations.

2) How do I start saving?
Knowing and taking control of your cash inflow and outflows is the key (see Making ends meet). That is, how much salary am I getting and how much am I spending each month. Don't forget things that happens once or a few times a year (for example, annual holiday trips, car maintenance / road tax, insurance premium) (see Managing one-off). These items can be missed easily because it doesn't happen every month.

3) Having multiple cash account for different purposes
You may consider having different cash accounts for different reasons. Simply, a transactional account, a compulsory saving account, and a surplus saving account. Some have creative names for these account, but essentially below is the purpose of each account.

• Transactional account: Account use to make all payments, withdrawals. Typically, you don't earn much interest even if you have cash balances in this account.
• Compulsory saving account: Amount you set aside each month which earns a higher interest rate. Here, you are saving for something in the long term (for example, initial deposit on your house, children's education, retirement). I have come across products that linked such saving to an investment strategy so that you can earn beyond the deposit interest rate. Depending on which country you are in, such products may be attractive. Personally, I prefer to have control over my savings and invest them myself.
• Surplus saving account: Surplus you saved each month which you can spend it anytime you want to reward yourself.

Arranging your cash this way allows you to visually see how much you have and helps you mentally organise your money. See the barefoot investor, who has alot more insight.

4) Consolidating your superannuation
This could be an Australia specific point. Over here, your superannuation contribution changes every time you change job. Not consolidating your super will result in unnecessary fees incurred. You may think it's not a significant amount, but over your career life the amount build up and compound significantly. Personally, I did went through the exercise of consolidating my super. It was easy to do. Although it can be a hassle, but knowing that you are in control of your own finances is important.

One of main resistance to managing our finances properly is that we tend to associate them with chores, and if we can, we will sweep it under the carpet. But I prefer to see it as "A dollar saved is a dollar earned."