Sunday, November 06, 2011

Personal Finance Part 25 – Holistic Tracking of Personal Finances

When thinking about personal finance, a colleague once asked me if my wife and I keep track of our spending and our mortgage balance, as she was also keen to settle down with her husband soon and wanted to find out the proper way of managing finances. This made me do some soul-searching and think about how I was personally monitoring my financial life and what spreadsheets I had on me which helped me to achieve this. Thus, this post is about the different aspects of one’s finances which one should track in order to ensure most bases are covered and you do not receive a “nasty surprise”. Unsurprisingly, it is Singapore-focused and some aspects (such as CPF) may not be applicable to international readers. However, I do feel that it is comprehensive and would welcome further constructive ideas or suggestions from readers on how to improve further.

The need for detailed tracking and documentation

You may ask yourself – why is there a need for detailed tracking, documentation and monitoring of one’s financial status, and why must it be comprehensive? I am of the opinion that if one’s knowledge of their finances is comprehensive, then one gets a much better understanding of all aspects of one’s finances; and knowledge is power. Being aware of your cash reserves, CPF balances, outstanding mortgage loan and investment portfolio would give you peace of mind that you are in control and that you have a grasp of what is going on in your financial life. To do so requires meticulous tracking and the use of either a spreadsheet or a device for monitoring (for those who download apps on your smartphones). An additional advantage of being aware also means that you are able to react and not panic should there be an urgent situation or an emergency.

Cash and Bank Balances

This section is essentially the “lifeblood” of personal finance. It constitutes all bank balances in all bank accounts and shows the detailed cash movements made during the month. This is also the section where I do simple budgeting. At the start of each month, I would input all my fixed expenses into the spreadsheet as a negative number (i.e. all GIRO automated payments like credit card bills, phone bills, utilities, conservancy charges, maid levy and insurance). The ending balance, if negative, will reflect the fact that I did not retain sufficient funds in my savings account to fund the month’s expenses. Other budgeted expenses which are discretionary (e.g. birthday gifts, red packets for weddings or birthdays) will also be input. On the income side, salary will be keyed in according to the timing of receipt as well as other miscellaneous income like rental and dividends. At this point in time I should emphasize – the timing of the cash flows is important if you are running a tight budget as most of the time salary comes in at the end of the month but expenses are ongoing. Thus, one can just run your mouse down to see if at any point during the month you dip into a negative balance. If so, then you should transfer some money from your opportunity fund to cover the gap temporarily.

In case I forgot to mention, I essentially have three “main” bank accounts. One is for operational expenses (day to day expenses) which includes food (meals), recharging of my EZ Link card, paying my bills and general entertainment. Another is a joint account with my wife which is usually quite static as it is reserved simply for common expenses like conservancy charges and utilities. The third is my emergency cum opportunity fund where I park my cash earning 0.8% per annum for quick deployment in case of investment opportunities. By having clear segregation, one can ensure one does not inadvertently “dip” into the opportunity fund to pay for indulgences and impulse purchases.

My personal practice is to transfer 50% of my take-home salary the moment it is credited in my bank account. This is essentially the practice of “paying yourself first” and I have been doing so for the past four years or so. One suggestion I can make here is to make payments through Internet Banking as much as possible as it will save on cheques and is much more efficient. My utilities and conservancy are on GIRO, while I pay my credit card bill and phone bill through Internet Banking. For cheques, I use those from CIMB as they are free of charge (POSB charges for the cheques).

For information, I am using POSB/DBS for my spending account, UOB for my joint account and CIMB for my opportunity/emergency account.

CPF and Housing Loan Balances

Another important balance to track is that of your CPF. Everyone knows this is a uniquely Singaporean forced savings account, which can only be partially withdrawn at age 55 (and even then, only if it’s above the ever-changing minimum sum!). Along with the CPF balance, I thought I would also mention the housing loan balance since I placed both on the same spreadsheet (but on different tabs).

Essentially, most people would use their CPF OA account to pay for the instalments on their housing loan; therefore it is important to keep track of the OA account to know how much “buffer” you have in case you lose your job or get a pay cut. Ideally, there should be a +ve amount being added to the OA every month, meaning the servicing of the loan drains less than the amount of contribution. But with housing prices rising relentlessly, this is becoming more and more of an impossibility as the contribution is capped at $5,000; therefore many couples may have to dip into their cash savings to top up their instalment (this would probably apply to those who plan to purchase a very expensive 5-room DBSS apartment costing in excess of $700,000).

It is also important to track one’s Medisave contributions and balance, to ensure one has sufficient buffer for medical emergencies and also for H&S insurance (the basic Medishield package can be purchased using Medisave funds). The current Medisave contribution ceiling is $41,000, after which additional contributions will be routed to the Special Account.

As the housing loan is an amortizing loan, it is important to build a spreadsheet which can at least project your instalment up to six months to a year in advance. My loan is an HDB one and thus the rate stays constant at 2.6% per annum, but for those who took up a variable-rate loan package where the rate is pegged to SIBOR or SOR, they may wish to input the effects of a sharp rate increase to simulate an increase in interest expense and review if they are able to stomach the increase without undue financial distress. Tracking the loan is also useful to simulate different scenarios of pay rises, pay cuts, retrenchments etc to see the effects on the ability to service the instalments, and then cross-check it to the CPF OA account to determine if sufficient buffer is in place to weather a crisis. The buffer is built up usually through bonuses (but which are subject to the revised cap of $79,333 for 2011) and one good way to reduce the loan amount is to make lump sum repayments. However, if you have a very cheap loan (<2%), then it may be more worthwhile to invest the money or just leave it in the CPF OA account (the first $20,000 earns 3.5% per annum risk-free). For myself, as my HDB loan amount as of this writing stands at about $75,000, I cannot refinance it at a lower rate through a bank and so it makes it worthwhile for me to pay it down through lump-sum repayments as far as possible, in order to clear the balance more quickly and be debt-free.

Investment Monitoring (Market Values and Dividends)

Investments are an important aspect of one’s finances as they will determine the amount of passive income which comes in every month, throughout the year. By “investments”, I am referring to mainly equities or bonds which pay a predictable dividend or coupon at specific times of the year. Tracking market values is actually secondary if you intend to be a buyer of long-term values, and if you intend to simply sit tight and enjoy the growth of the companies within your portfolio over the course of years. I find it useful to maintain a spreadsheet which tracks my total cost and market value at the end of the month or a certain period, to ensure that I adhere to my aim of capital preservation, and also to be able to monitor my additions to the portfolio over time as I accumulate funds.

I use separate sheets for purchases, tracking of daily market prices and index levels, as well as portfolio values and dividends. Suffice to say that my spreadsheet is pretty massive and complex and is all inter-linked so that I can have easy access to information regarding my portfolio and dividends at any instance. Dividends are recorded by calendar year and receipt dates are clearly input once a dividend is declared, so that I can, at the same time, update my cash spreadsheet for the exact receipt date and amount based on my shareholdings. At this point, you can probably tell how one spreadsheet is linked to another, as the effects of one may result in changes to another. Rather than link up all this via formulae (which can go horribly wrong if cell references change or sheets are inserted/deleted), I usually input the amounts manually. One needs to have discipline and patience to track these numbers but over time you will get used to it, and probably even enjoy it!

Insurance Portfolio and Details

The fourth and very important aspect of tracking is one’s insurance portfolio. Insurance is a necessity for everyone (in my opinion) as it will buffer you in times of emergencies and helps you to avoid large expenses. I have my wife’s and my policies summarized on one spreadsheet, with separate tabs for mine and hers. The spreadsheet should contain details of type of policy, insurer’s name and contact details of insurance agent (financial planner), payment amount (whether monthly or annual, mode of payment and date if GIRO-deducted), coverage amount, and other salient details like whether it is pegged to inflation or is a reducing balance (for reducing term loans for example). Essentially, the summary should be able to tell you at a glance what your total coverage is for various types of conditions like death, disability, TPD and accidents. Most important of all is the H&S policy (I consider this a compulsory policy for everyone) as the premiums are very low compared to the amount you need to fork out for just one hospital stay. I would strongly suggest paying a higher premium for private hospital stays in A class wards. When my daughter was hospitalized mid this year I easily earned back nearly 10 years of premiums!

An insurance portfolio should be balanced with Term policies, H&S, endowment (should you choose one – I did not as I intend to invest the money on my daughter’s behalf for her future education) and disability income. You should try to cover most aspects of your life which may cause financial difficulties if something happens to you. Remember also to include details of your beneficiaries – as one ages this will change as your parents may pass on or you may have more children.

Credit Card Balances

This is actually optional but I had included it as I know many people out there have multiple credit cards, thus it would be helpful if one could summarize each card’s expenses in an easy-to-read spreadsheet, along with amounts and due dates. One has to be very disciplined about this and update the spreadsheet as soon as a transaction is completed which involves a credit card being swiped. Readers may argue that the banks will send credit card statements so why track this manually? The problem is that so many statements with different formats and due dates can result in considerable confusion, and I have read of blogs where the bloggers have lost track of one or two statements and ended up having to pay not just late charges but also the accrued interest of 24% on outstanding balances past due date. One then has to go through the hassle of asking for a waiver. For myself, I only have one credit card and hence I do not practise keying in every transaction – I mentally am able to tally up the amounts I spend every month and will control my spending once it hits my pain threshold!

Net Worth Summary

This is by far my most important spreadsheet as it summarizes all the other aforementioned spreadsheets and consolidates and collates the information together. In essence, the net worth spreadsheet will incorporate all your cash balances in all bank accounts, surrender values of all insurance policies, market (monthly closing) value of all investments plus any other funds from other sources; this will yield a number which will represent your total assets.

Beside my total assets column is another column which measures the increase or decrease in the value of total assets month-on-month. Ideally, this number should be always increasing, assuming that you save much more than you spend! However, due to the volatile nature of equities and also bonds, the figure may thus fluctuate according to economic cycles, but the general trend should be upwards over the course of say 3-4 years (this is usually a long enough period of time to experience a full bear/bull cycle and hence will smooth out all fluctuations for market values). Do not be unduly distressed if total assets take a sharp plunge due to Mr. Market’s mood swings – just focus on increasing your cash holdings every month and to plough some money into solid, well-managed companies, and over time the value of your total assets can only increase.

As proof that this can occur with disciplined savings and investing, in October 2005 (6 years ago) my total assets was just $41,000. As at end-October 2011, the total assets amount has touched $320,000 (this also includes my daughter’s Government CDA-Extra account with OCBC Bank). That is nearly an 8-fold increase over 6 years and it could not have been accomplished without perseverance, sacrifice and a well-established investment philosophy (coupled with a little luck on the side too admittedly).

Finally, another column will show my HDB loan balance decreasing as the months go by, and thereby I can compute my net worth which is total assets minus all loans (in this case, I only have one mortgage loan). This figure has also hit an all-time high recently of around $245,000. Assuming my monthly expenses are about $3,000 a month, I would be able to sustain myself for about 81 months without additional income. One should think of wealth in terms of how long one’s net worth can sustain oneself if both spouses stop work. This is how I have been measuring myself for the last couple of years. Another method of measurement is to monitor my total dividends over the course of one calendar year to compute my average monthly passive income (currently, it stands at about $1,100 per month). If this eventually exceeds my monthly expenses, then in theory I would then have achieved financial freedom and can choose not to work. [Note: I did not include the market value of my primary residence in my net worth computation because to realize this value would imply that I would have to sleep at the void deck of my HDB block.]


As can be seen above, it takes some time to prepare and psyche oneself to monitor so many aspects of one’s finances, but start slow and steady and soon you would enjoy the process of being in control of your finances. I have shared many personal details of myself which most people will not even share with their spouse, so I hope that this post will help people to organize their finances more effectively; as well as serve as inspiration for those who are just starting out in their career and wish to build up sizeable savings and investments as a prelude to retirement planning.

Although I must admit I am still a long way off from my target of half a million dollars by the end of next year, and passive income of $3,000 per month; nevertheless I feel I am progressing well on my journey and shall endeavour to carry on climbing towards the summit!


la papillion said...

Hi mw,

I did all the same spreadsheets as you did, except for the summary on the insurance part. Maybe I should do it too :)

I think everyone should do this kind of things, if not monthly, then at least every half a yr or annually. If you do not know where you stand know, how do you know when you'll reach your goals? No doubt many people would find the task daunting and tedious, but that's the point. If you don't put some effort into tracking your financial health, you probably wouldn't be very healthy :)

Thanks for sharing how you tracked your finances :)

OT83 said...

Hi MW,

Truely amazing.

"in October 2005 (6 years ago) my total assets was just $41,000. As at end-October 2011, the total assets amount has touched $320,000 (this also includes my daughter’s Government CDA-Extra account with OCBC Bank). That is nearly an 8-fold increase over 6 years"

Increase by 8 fold over 6 years. You set the goal for me to acheive! All the best to your goal of 500k!

Temperament said...

Hi MW,
Marvellous investment result. 8 fold. You have achieved this definitely partially because of your detail tracking of your money. But the most important thing is so one day you will know you have reached your "enough". Maybe one $million, two $million. Well everyone of us has different "enough". On the other hand if you don't track your money, you will never know when you have reached your enough. You will never find fulfillment and $$$richness in your life. Bravo!

By the way, how save is CIMB checking account. i mean Moody or Fitch credit rating for CIMB bank.
i use the same account but a little bit worry.

la papillion said...

Hi Temperament,

I think mw means total assets, so I assume it's not just the investing returns but also includes 'capital injection' like savings. Let him clarify on that :)

Temperament said...

Hi LP,
Yes i think you are right. i have use the wrong words. i want to say from 41k to 320K , the absolute multiply of "total assets"- 8 fold in 6 years is marvellous.
Let MW comfirm.

Musicwhiz said...

Hi LP,

Hey glad to know my summary did help, in that you feel you should add on the insurance portion for tracking as well! That said, it's already very good that you are tracking all other aspects, kudos for that!


Musicwhiz said...

Hello OT83,

From your nick I can tell you are 7 years younger than me, so you are 28 this year. Well, that was the year I actually began investing (i.e. 2004) at age 28, putting an initial $6,000 to purchase 6 lots of Suntec REIT which had just IPO-ed in Dec 2004. I think at your age, it's not too late to start and to beging to track your finances carefully, so that over time, you can accumulate a substantial amount.

I guess my example is just one example of how I had grown my assets, and you should not take it as an absolute benchmark but should instead set your own goalposts according to your own personal financial circumstances. As I did mention, I also was fortunate not to have lost a bundle during the 2008-2009 bear market, and instead managed to realized good profits from companies like Ezra, China Fishery and Swiber (even though these were all eventally classified as "mistakes").

The important thing is to continually learn and to customize your own approach to building wealth. What I posted is just a rough guide, but I sense you are very determined and therefore you will find your way. Good luck!

*Note: By the way, the amount represents the total assets of myself and my wife (i.e. my family's assets) and not just my own personal assets. So perhaps it's not so surprising after all since it's a joint effort. :)


Musicwhiz said...

Hi Temperament and LP,

Yes to clarify it is total assets and not just investment returns/funds. This would include investment capital gains, market values of existing counters, cash balances and savings over the years and also dividends received in cash. I do hope to increase this to my target of $500,000 by end-2012. It's a lofty target, agreed, but without a high target there will not be sufficient motivation!

I agree with Temperament that I have to figure out how much is eventually "enough". It might be $1 million, or two (unlikely) but eventually it has to be an amount which can generate sufficient passive income for my family to subsist comfortably (and also provide financial support for my parents and parents-in-law, if need be).


PanzerGrenadier said...


I realised the benefits of recording my own income and expenditure as well as balance sheet after I started tracking in 2008. It has helped me to make better decisions over time about how much of my investible net worth has grown over the years and how it was deployed between cash, equities and other balances.

It takes effort and discipline to maintain as it has to be a habit to be internalised to be effective.

Be well and prosper.

financiallyfreenow said...

Thanks for sharing, MW! I learnt lots from it.

thepotatotimes said...

Hi Mw,

I have a networth spreadsheet and insurance summary as well, with the latter to faciliate easier 'searching' by my dependents if I were to leave without warning one day. At least at a glance, they can see what I have, especially since my wife is not the sort interested in financial matters.

That said, I find it quite a chore to track my personal expenses, hence I choose to transfer a predetermined amount to my 'working' account every month for discretionary spending. And like you, I also have 3 accounts, and for the same purposes too ha ha!


greypiggi said...

guys there is a much easier way. Just spend $100 and buy a Quicken home edition or Microsoft money and you can track all your bank accounts,investments, properties etc.

Can then generate pretty graphs on all sorts of stuff and can also integrate with american brokerages to get online quotes and numbers.


Musicwhiz said...

Hi Panzer,

Yep, it requires discipline as you said. Your blog has also helped me shaped a lot of my ideas on personal finance over the years, so have to really thank you for that as well! Yours is one of the earliest and definitely one of the better Singaporean personal finance blogs around. Keep it up!


Musicwhiz said...

Hello FFN,

You're most welcome. Keep blogging too, I enjoy reading your posts!


Musicwhiz said...

Hi Blackjack,

Oh that's a good idea actually, to let my wife know and understand all my spreadsheets! Yes, just in case something happens one day, I also want to make sure all the money is well taken-care of. Thanks for reminding me on that!


Musicwhiz said...

Hi Greypiggi,

Thanks, yep a friend actually introduced me to MS Money and I have downloaded the software. Have also heard of Quicken. But for me I personally prefer to stick to my own spreadsheets which I have formatted on my own and understand very well.

But that's a good suggestion for people who are just starting out tracking and who may find the task daunting. But I think MS Money is not being sold anymore (it's an old software) but Quicken is still very popular. Not sure if it can integrate with SGX stock prices though, haha.


yun said...

Hi MW, I think we should include the property value when calculate the networth. If not, the networth for one with 200K cash but without property will be the same as the one with 400K cash but with housing debt of 200K. If one day, the one with property decided to sell his house at 400K, his networth will have sudden increase of 400K to 600K. To make it apple to apple comparison, isn't that we should include the property market value? The reason I am asking is I am currently without a property, but if one day I decided to become home owner, does that mean my net worth suddenly becomes negative??

la papillion said...

Hi yun,

I would think that having a conservative figure is better, hence not counting the property entirely is what I would do as well. Still, it depends on what you want to do with the networth figure. It's not going to change anything if I change the rule in how I derived my networth figure, only the numbers changed.

Let's see what mw has to say about this :)

Musicwhiz said...

Hi Yun,

Thanks for your comment. I understand where you are coming from. The reason why I decided to exclude live-in residence under total assets is because you will need a roof over your head, therefore factoring in the market value of the property is not conservative as this means that when you sell your house you will be bereft of a place to live.

Let's say you are currently living with parents - this means that indirectly, they are "sponsoring" your stay as the expenses are borne by them, but your total assets do not reflect this "liability" (technically, you do owe your parents a "debt" of gratitude for housing you, clothing you and feeding you!). Therefore, when you move to your own place, you have to recognize this previously unrecognized liability in the form of your mortgage loan.

Not sure if this makes sense to you (maybe I explained it poorly), but essentially what I am saying is that you should try to be as conservative as possible and not over-state assets and under-state liabilities. Yes going by this equation most people would have a net liability if you factor in the mortgage loan, but as long as you are gainfully employed this is not a big issue as the income can service the loan.

The idea is to work towards being in positive net worth as you build up and accumulate your wealth over time (that's what a lot of my friends are doing after taking on significant mortgage debt).


Musicwhiz said...

Hi LP,

Thanks for chipping in hehe! Yes you are right the NET worth remains the same - but as I explained to Yun it's what you want to recognize or not which makes the difference.