Three Stages in Personal Finance

There are three stages in personal finance that a normal person must go through before thinking of achieving financial freedom.

Stage 1: Learn how to make your money
For a normal person who has finished their education stages, he or she must find a job in order to earn a living. A lot of people has managed to pass this stage and has a pay which is more than their expenses.

Stage 2: Learn how to save your money
After having a income, one must learn how to protect his or her money. Not all people has passed this stage due to overspending, or too much family commitment. People who are stucked at this stage will have zero or little saving. And they are more likely to take more loan as compared to people who has a higher saving. Taking more loan mean that they have to pay more interest which make them poorer.

Stage 3: Learn how to grow your money
After passing stage 1 and 2, one must learn how to grow his or her money. A lot of people has ignore this stage as these knowledge are normally not taught in school. That is why a lot of people is unable to acheive financial freedom after working all of their lives. Most people work for money, rather than letting money to work for them. They can save a lot, but due to inflation, they are actually "become poorer". One must learn how to grow their money, otherwise they will become a work horse forever.

Once these three stages are cleared, one can start to think of acheiving financial freedom status. As for me, I have managed to clear these three stages and now slowly gearing toward financial freedom.

"Branded" Bread is Expensive

Have you ever go to shopping mall to buy those "branded" bread from those well-renovated bakeries. These breads from these bakeries look very attractive and people are often are lured by the design and the name of the bread.

However if you look at the price, normally it will cost about $1.20 to even $2 plus per piece. It is very expensive in my opinion. For those normal neighbourhood bakeries, the bread only costs about $0.60 to $1.20 each. Now I am thinking, are people just go for the "brand" and design of the bread, or the taste and value of the bread?

Let's say bread from a "branded" bakery costs $1.50, and you can get the same type of bread from the normal neighbourhood bakery at the price of $1.00. Assume that one month you buy 30 pieces of bread, "branded" bread will cost you $45, and the normal bread will cost you $30 in total. You can see that you can have a saving of $15 per month or $180 per year if you just buy the normal bread.

So are you going to pay a premium for "branded" bread? As for myself, I will just buy it from the normal neighbourhood bakery as lowering my expenses is part of my cash flow framework.

It is cheaper to buy your necessities in bulks

I have failed to realise in the past that it is cheaper to buy thing in bulk. I always buy thing in small amount or quantity just for the ease of carrying. But now I realise that buying in small amount or quantity usually is more expensive than you buy the item in bulk.

This is what had happened two days ago:

I was trying to find the cheapest price for 6 x 250ml packets Milo drink. So I went to various shops to find out the price and here are the findings.

In supermart N, it cost me $3.80 for 6 packets, or $0.63 per packet
In provision shop A, it costs me $3.50 for 6 packets, or $0.58 per packet
In provision shop B, it costs me $3.30 for 6 packets, or $0.55 per packet
In provision shop B, it costs me $12.50 for 24 packets, or $0.52 per packet

First thing I realise is, different shop can have very different price for the same product. What surprise me is the price in supermart N, which is very expensive as compared to other provision shop.
Second thing I realise is, I can get cheaper price if I buy thing in bulk.

My next plan is to list out all the things that can be bought in bulk so as to lower my expenses on the necessities. Lowering my expenses is part of my cash flow framework.

Signed up as a NTUC U Member

I have just signed up as NTUC U Member online. The membership is $117 per year.

The reason why I signed up is because there is a wide range of member privileges and benefits which can help me save money.

The best benefit as a member in my opinion is the 4% rebates at NTUC FairPrice. Every year, I spend around $3600 on groceries. So 4% out of $3600 is $144. The rebate is already more than the membership fee. This is a no brainer reason why I signed up as member.

There are many other benefits and you may see it by clicking here.

Reducing my expenses without affecting my quality of life

Under the expenses in My Cash Flow Framework, there are two items. One is identified necessities and another portion is reduces liabilities. Now it is time for me to check on these two items. I will see whether I can reduce my expenses without affecting my quality of life.

I will start in looking into my groceries list and see is there any thing that I can do to reduce the cost. I will

• Check whether is there any cheaper products that can perform equally well or even better than the current products that I always buy.
• Is there other places that offer better price for current products that I buy.
• Is there any unneccessary items that I will not need in my groceries list.

Another thing that I will look into is how I spend my money on food and drink. I always know that going out for meals in Singapore is always very expensive. For example, soft drink in coffeeshop will cost $1 plus. I found it ridiculous, as a can of coke from supermart is only $0.60. And also a plate of chicken rice in food court will simply cost $3.50, whereas some coffeeshop only sells it for $2.00.

I have no target in the amount of money to save, but if I can acheive to save $20 per month it is already very good. Saving $20 per month is like increasing your passive income by $20. In order to increase your passive income by $20, I need to invest $4800 which give me a return of 5% per year. So which is easiler, reduce your cost of living or increase your passive income?

Choosing the best value chicken rice in my town

In my town, there are a lot of chicken rice store around. I have listed 4 chicken rice stores and their prices in the above diagram.

For coffee shop A, it is only 1 minute away from my house, but price of the chicken rice will cost 66.67% more as compared to the cheapest price in town.

For coffee shop B, it takes me 2 more extra minutes to walk as compared to the coffee shop A. The price of the chicken rice is 33.33% more as compared to the cheapest price in town.

For coffee shop C, its chicken rice price is the cheapest in town. But it will take me 5 minutes to walk and there are less meat in the chicken rice.

For Food court, it will make me to walk the most and cost me the most as compare to other coffee shop.

After the comparison, I declared that coffee shop B has the best value. Walking a bit more to save an extra $0.50 is definitely more worthwhile to me. Just to highlight a point here, cheaper doesn't mean better value.

My choice is inlined with My Cash Flow Framework , under Expenses(Reduce Liabilities).

My Cash Flow Framework

Creating a framework is good for me to keep track where my money comes from and where it goes. You can see from the diagram, I have stated what are the things to be done in each of the five core areas namely Income, Expenses, Saving, Buying Asset and Passive Income.

Income:
I will concentrate on increase my monthly income and find other income sources.

Expenses:
I will identify what are the necessities and try to reduce my liabilities.

Saving:
I will split my saving into two portions. One portion will go into my investment, and the other portion save inside the bank.

Buying Asset:
I will identify what shares or ETFs to buy, and plan out a strategy on when to buy.

Passive Income:
I will use the dividends for reinvestment.

Cash Flow Diagram

Cash flow diagram is used to find out where your money go to when you got your pay. The above is the cash flow diagram that I have designed for myself. Of course, I have taken out the exact amount in each item.

Cash flow is basically what you get after deducting your expenses from your pay. Those people who have a lot of liabilities are more likely to have less cash flow or even worse, negative cash flow. Remember in my last post, I say reduce your liabilities and increase your assets is the way to be rich!!! I have put part of the money in cash flow to saving and another part into buying assets.

Re-investment of money received from the passive income is very important. By doing that you can compound the growth of your money . If you do it properly, you can achieve financial freedom faster.

I also draw out My Cash Flow Framework , which has more details than my cash flow diagram.