NU #3: Financial Health by Budgeting by T. N. Gaudi

NU #3

26 January  2013

MBAH 10-B / Entrepreneurship

Financial Health

(Spending Habits)

By T. N. Gaudi

The scope of this NU12 is limited to allocating or budgeting finances to be able to maximize its value. This paper does not cover on improving income streams. It is recognized however that income generation is still key if one wishes to be financially fit.

The central problem presented here is that people usually spend all of their income just a few days or weeks upon receiving it. One of the primary reasons why this happens is that people spend beyond their means without actually being aware of it. The result is that they have no more left for savings and investments and worse is that they sometimes even incur bad debts. My objective here is to create and illustrate a system which relatively anyone can easily adopt and make as habit. This system should be able to help achieve financial leverage.

The system is similar to the envelope system which allows allocating resources or any windfall into different funds upon getting hold of it. The key to this system however is in the automation of the parts of the process so that we could create a type of forced savings or forced allocations. Automation promotes consistency and eliminates the volatile reactions of human behavior in the context of spending or financial management.

Basically the allocations should be categorized into four major funds namely:  the basic fund, the contingency fund, the savings fund, and the investment fund. The basic fund should be allocated for monthly living expenses including spending allowances. The contingency fund should include preferably 3 to 6 months of your monthly living expenditures and should only be utilized when an unforeseen need or a catastrophic event arises. The savings fund is allocated for short to medium term projects that also include term insurance and the annual allocation for health care insurance among others. The investment fund is actually a retirement fund wherein you allocate a portion of your savings (10% to 20%) and where you hedge and grow it by putting it in higher yielding facilities such as in bonds, mutual funds, and especially in the stock market. Creating an investment fund will allow you to harness the power of compounding while hedging your resources from inflationary forces.

By using the services offered by the bank for free (almost), one can make arrangements so that funds are automatically allocated from the main account to the 4 major funds. For the contingency fund it is best that it is in higher yielding deposit accounts such as the time deposit or SDA (this account should be preferably applied without an ATM access). For the basic fund, this should be put in a regular savings account and can be applied with an ATM access card for convenience since also this account will be drawed from upon regularly. For the savings fund, it is preferred that it is placed in a current account that yields higher interest than a regular savings account. For the investment fund, any regular savings account that can preferably be registered online will do. This is so that it will be easier to manage investments especially if it is diversified into different instruments. 3.5

I believe that this particular arrangement will help change behavior towards managing one's finances and will create a habit that will allow for the improvement and growth of one's financial health.