How To Make Your Money Grow

How To Make Your Money Grow

As the saying goes, "one never plans to fail but fail to plan". In order to achieve the above the first step is to develop a better understanding of your finances. That could be achieved by generating two statements, namely; Cash Flow Statement (monthly) and Balance Sheet.

The Cash Flow statement will provide us with a picture of our monetary inflows and outflows, by analyzing the statement we would arrive at a better picture of the state of health of our finances.

The Balance Sheet will provide us with an overview of our asset and liabilities. The resultant net worth will provide us with a clearer picture of our overall state of financial health.

By analyzing the Cash Flow Statement, we could identify the income and expenses. Expenses could be broken down into variable and fixed expenses. Fixed expenses could be for basic necessities such as housing, food, transport etc. Variable expenses could include leisure expenses, holiday expenses etc.

One essential component of making your money grow is a discipline savings habit. For many people, savings are more accidental rather than with purpose. This should not be the way, savings should be a planned item within your monthly cash flow. By planning ahead towards saving regularly the resultant growth in asset would prove to be more efficient.

To build up your savings, first build up your emergency cash fund. A common ratio is three to six times of your monthly income. Next you should ensure that you are adequately covered for catastrophic event in life (such as medical treatment cost etc.) Beyond that you should strive to save a minimum of 10 % of your monthly income (after CPF).

Saving for savings sake is insufficient. You should plan ahead for your savings. Identify your objective for your savings and by doing so you would arrive at the time horizon. With a suitable time horizon you could then decide on the form of savings that you should undertake. To illustrate, interest for savings account is only averaging a miserly 0.25 % p.a. to 0.5 % p.a., having excessive liquidity implies an opportunity cost of lower returns. For example, with a time horizon of 10 years or so, one could reap returns ranging from 3 % p.a. to 4 % p.a. with a regular premium endowment plan. This shows that with proper planning, by identifying objective and establishing time horizon, a person could grow his money more efficiently.

Historically cash has returned the lowest return over the years where as stocks has generally generated the highest return. High return entails high risk. One way to ride out the volatility of investment is to do so through a regular savings plan using unit trust.

Unit trust is an investment instrument where as investors we purchase units in the fund. A fund manager who should possess greater skill and tools in managing our funds will manage the fund. Through unit trust we could achieve diversification as well as professional management.

A regular investment plan entail that we invest a regular sum through a certain time period, this is known as Dollar Cost Averaging. In a volatile market, dollar cost averaging should lead to a lower average cost per unit. Savings through a regular investment plan would thus lead to us building an asset that is higher yielding in returns as well as reducing our average cost. Having said that there exist many parameters that we should consider before investing, you should approach a Financial Planner to develop a greater understanding of your objective as well as risk profile before engaging in investment.

Concluding, to "Make your money grow", you should:

1. Have a clear understanding of your own financial situation
2. Establish your objective for savings
3. Be self discipline in your savings habit
4. Be prudent in your expenditure
5. Embark on a suitable investment plan to enhance your return.
6. Review your finances and investment regularly

Contributed by:Mr Andrew AngCERTIFIED FINANCIAL PLANNERTMMember of Financial Planning Association of Singapore