Circle of Finance define the way we manage our money in 5 categories which are Income, Expenses, Savings, Protection and Investment. The priority as per listed, which mean we need to focus on Income first, then only followed by Expenses, Savings, Protection and Investment.
Income
Refer to our ability to generate money. It can be Active Income or Passive Income but the best is Scalable Income.(refer to Scalable Income to know more). This is the very first step we start our financial planning as without money inflow, we have no money to plan at all.
Personally i would recommend to create at least 2 income source, which say other than your main job, try to find other part time work to earn side income. That is the fastest and safest way maintain a good income. Due to Covid-19, i had seen a lot of job loss and people start to be panic. But for those who have side income, they have extra skill, extra opportunity. For some people, their side income end up growth bigger and become their main income. Well, early stage of course will require more time and effort, but making money is never easy, that why people are rich for reasons.
Don't expect to get extra if you don't do extra!
Expenses
Spending or money out flow. For expenses there are 2 category, fix expenses and dynamic expenses. Fix expenses are those essential spending that fix every month/year such as house installment/rental, food, transport, and etc. Dynamic expenses are lower priority and good to have expense such as travel, accessories and other entertainment.
For earlier stage, as income is low, thus I will recommend to have tight control on dynamic expenses. Get a affordable phone, drive a national car, travel within the country, because Saving is best way to accumulate investment fund when your income are low. Then when income growth higher only slowly increase the dynamic expenses.
Understand what is essential and what is not!
Savings
Saving here refer to money for you to achieve your life goal on different phase of your age. Marriage, Give birth of baby, Hospitality, House Deposit, and etc. All this important event in our life require money. Thus Saving is essential. Also we are required to have at least 3 - 9 Month of urgent fund to cover our fix expenses. This is to handle unexpected situation that cause us loss our income, example - Covid-19 during 2020 had lead to close down of 32,000 business in Malaysia and the number is still growing. Job cut, Retrenchment announcement happen almost every month.
To make sure I maintain good saving, I implement Force Saving technique. Whenever we recieve our monthly income, after deduct Fix Expenses, then I will force to save 300-1000 then only spend the remaining. Force Saving = Saved before you spend for unnecessary. This practice maintain until I got around 9 month urgent fund.
Protection
Protection here refer to Insurance. As insurance provided a leverage of our money to protect our income and property, in other word, use small money to protect big money. These are essential item as we have too many uncertainty that can cause us losing our income ability and etc.Normally there are 4 category, Medical Card, Critical Illness, Life insurance & Personal Accident. (exclude investment product, I don't really like Insurance that tied with Investment linked product as it defeat the purpose of Protection.) Most insurance firm allow us to customize the ratio, I always cap the investment link until very minimal.
- Medical Card : Insurance that cover you hospitalization expense.
- Critical Illness : One lumpsum (or multiple) amount of Money that paid to you whenever you suffer with the illness specify in contract.
- Life insurance : One lumpsum amount that paid to you when you are disable (depend on criteria specify in contract) or Dead.
- Personal Accident : Small amount that can claimed for situation that cause by accident. (have the highest leverage capability)
Investment
Passive income that require lesser time compare to active income and able to growth in scale. We have a lot of investment product available but most common one are Property Investment, Forex Investment, Share Investment, Derivative Investment and Commodity Investment. Out of these 5 investment, personal I like Share investment the most due to it flexibility.
- Property Investment - Required high initial cost for downpayment, risk is lesser if you buy a property in good location.
- Forex Investment - High risk but high gain as well, required tight monitoring as Forex normally trade along with high leverage and margin.
- Share Investment - High to low risk depend on you trading strategy. Flexible and low starting cost but require a lot of effort and time to learn.
- Derivative Investment - Contract, Option, Warrant or product that derive for other financial tools. Required Professional Skill & knowledge to operate.
- Commodity Investment - Raw material or primary agricultural product that can be trade such as Coffee, Gold, Silver, Palm oil and so on. Often use as hedging tools.
Summary
Circle of Finance is a good reference for financial planning as it categorize and specific that priority for us on how to use our money. The correct flow as per below:
- Generate and Maximize your Income as much as possible.
- Control your Expenses in healthy level.
- Save for your necessary event in life and urgent fund.
- Protect your property / income generating power.
- Invest for better future or earlier retirement.