My Financial Profile – Income and Expenditure

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If you meet with a financial adviser, the first thing they will do is take you through a fact-finding process to understand your current financial position. This financial profile then forms the basis for advice.

Today you can begin work on your own financial profile, starting with income and expenditure. It’s up to you how you record this. You can simply write it on a piece of paper, make your own spreadsheet, or use the handy Financial Profile I have created here: My Financial Profile

Some of you may already know exactly what your monthly income and outgoings are. Maybe you are recording them already, in which case, well done! Some people may have a general idea but have never actually looked at the numbers in detail. And then there are the “I don’t know where it all goes” people – this is for you guys especially!

Start by opening the first tab of the Financial Profile – Income and Expenditure. If it’s your first time doing this you may prefer to record the figures on a monthly rather than an annual basis. The top part is for income.  If you have a regular job and tax / insurance / pension contributions are deducted at source, you may find it easier to simply record your net earned income – the amount that actually gets paid into your account every month. If you are self employed and/or have income from multiple sources you may find it easier to record your gross income. If your income fluctuates you may want to look back over the last three years and work out an average number.

If you have income from sources other than work, such as rental or investment income, then record those too and total it all up. If you have a partner who also has income, record that too.

Now for the fun part! Figuring out all the things you spend money on every month. Some organised people might be keeping receipts and records already. If you belong in the “I don’t know where it all goes” group, you may actually need to spend a couple of months gathering receipts and keeping track of your spending. A friend of mine recommended the Spending Tracker App. However you do it, try to record everything you spend over the course of an average month. If you have to estimate some items, that’s fine.

What we are really looking for is a number in the box at the bottom, indicating your monthly surplus over expenditure, or disposable income. Simply put, it’s the money that’s left over at the end of the month. Knowing this number helps us understand later how much of our savings we should be allocating to longer term investments each month. Total income minus total expenditure gives you your disposable income.

If you find that you have more month left over at the end of the money, then the first thing you need to do is look for things that you can cut from your expenditure list. Remember the goal here is to spend less than you earn so you have money left over to save for the future.

So hopefully you have been able to work out your monthly surplus over expenditure. Let me know if you have any trouble with this.

What is your base currency?

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Soon we will get started with your financial profile, where you will be recording your income and expenditure and building your own personal balance sheet. In order to boil this down to the most important numbers you will need to decide which currency to calculate in.

For expats this can be a tricky business. You may live and work in Japan for example, and earn money in JPY. However you may have assets, or even income, in your home country or elsewhere in other currencies. How do you decide which is your base currency?

For completing your balance sheet and adding up your total assets we could argue that it doesn’t really matter. Just pick the currency you use the most and convert all values to that. However from a financial planning perspective there is a clear rule: Your base currency is the currency you are going to spend the money in. If you are just going to live in Japan for a few years and then move back to your home country permanently, then the fact that you earn in yen is largely irrelevant. You will need to plan in the currency of your home country as that’s where you will spend the money. This is important to help manage currency risk. It would be a shame to build up a tidy sum in assets in JPY, only to find when you move back home and need to start using the money, that the yen has crashed and you are getting a really bad deal on the exchange rate.

If you are going to stay in Japan forever and retire here it’s pretty simple. Your base currency is JPY. However, what if you plan to send your child to university in the UK and need to save for that? Yes, it’s actually possible to have multiple base currencies. In this case you would save for retirement in JPY and save to pay for your child’s education fees in GBP.

So before you start your financial profile, it’s important to work out your base currency. When you fill out your balance sheet use the currency that you are likely to spend most of the money in. Feel free to contact me if you are unsure.

A Simple Formula

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When it comes to taking complex strategies and tools and making them so simple, that anyone can apply them immediately to improve their quality of life, Tony Robbins is a master. Here is his simple formula for creating financial abundance:

  1. Spend less than you earn and invest the difference.
  2. Re-invest your returns for compounded growth.
  3. Reach a critical mass of investment capital that creates the annual income you desire for life.

If you are not sure what is meant by compounded growth, take a look at the charts in this article. (the article is a few years old but the charts tell the story well enough)

In the coming posts we will get started with your personal financial profile. The first item on there is income and expenditure, and hopefully you will find that you are already spending less than you earn!

Have you covered the basics?

 

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If I had to come up with three basic financial planning points that everyone should be taking action on, they would be as follows: emergency cash reserve, basic insurance, and some kind of pension. Without getting into too much detail, here are basic definitions:

  • Emergency cash reserve: this is money in the bank, not invested, and easily accessible. If you lost your job tomorrow, how long would you be able to survive before finding a new one? Typical advice is to have 3-6 months of expenses covered before you start thinking about investing. If you have a very secure job you might be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable.
  • Basic insurance: if you get sick is it going to cost you? If you work for a company in Japan, for example, you are likely to be covered by the Japan national health insurance. However what if you are long term sick? How long will your company continue paying you? Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost.
  • Pension: I deliberately referred to “some kind of pension” above. We are not going to get into details now of the options available. (we will later for sure) The question now is: are you currently putting aside even a small amount of money every month for when you are older and no longer inclined / able to work?

You may be surprised to hear that all three of these come under the umbrella of protection. A cash reserve protects you from having to dip into investments or borrow money in a crisis. Insurance protects you from events that can derail your ability to generate income. And a pension protects you from being poor in old age. How are you doing on these three basics so far?

Where are you at financially today?

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Over the coming days we will be discussing how to build up an accurate picture of your current financial position by looking at your income and expenditure, balance sheet and asset weighting. Before that though, let’s start with a few general questions you can ask yourself to get a sense of where you are today and how you feel about it. Try to answer on a scale of 1 to 5 with 1 being terrible and 5 being outstanding:

  1. How would you rate your current income?
  2. How would you rate your net worth?
  3. If you have any, how do you feel about your current investments?
  4. How would you rate your current cost of living?
  5. How would you rate your level of monthly saving?

How did you score out of 25? Anything over 20 and you’re in a pretty good place. 15-20 indicates relative comfort, but with room for improvement. Less than 10 and you might need some cheering up! Regardless of your score, did you learn something from answering these questions? What areas do you need to focus on to improve your current position?

How do you feel about money?

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Whether you believe “money is the root of all evil” or “money makes the world go round”, your psychology with regard to money will impact upon your decision making.

Why not take a moment to review the questions below and see how you really feel about money and your finances:

  1. How do you feel you are doing financially right now?
  2. What are some positive / negative emotions you have about money?
  3. What is your greatest fear about money and finances?
  4. How much do you think you are capable of earning annually? Are you earning that much now?
  5. How are the people around you doing financially?
  6. What is an absolute must for you right now financially?
  7. What is your ultimate financial dream?
  8. What is your current level of financial pressure?
  9. What is your risk tolerance for investments? Conservative, moderate or aggressive?
  10. What is your overall rating for your financial psychology on a scale of 1-5?

Our beliefs about money can either support us or deter us from successful financial planning. If you are thinking “This is too hard” or “I don’t have time for this”, then perhaps you need to work on developing some more empowering beliefs to help you along the way. If you are thinking “I’ve got this” or “I’m ready to take control of my finances” then you are good to go!

Welcome

Well they say the first step is always the hardest. If you’re reading this, congratulations! You are probably thinking it’s about time you got around to organising your personal or family finances, but where to start? There’s so much information available these days that it’s easy to get bogged down in detail and never do anything. Well hopefully this blog can help.

First off some disclosure: I’m a U.K. qualified financial planner and have been working as a financial adviser in Japan for over 12 years. During that time I have met hundreds of people from different backgrounds, countries, and walks of life, all wrestling with one or more of these basic issues: saving money for retirement and their kids, protecting themselves from financial mishaps, buying a home, caring for aging parents, dealing with the taxman, and trying to become financially free.

The purpose of this blog is not to sell you a product to plug one of these needs. The way people access financial products and advice is changing rapidly and there has never been a better time to take control of your own financial destiny. The mission here is to provide a resource to help you to do just that. Like financial planning itself, this blog is a marathon and not a sprint. Over time we will cover financial planning basics, how different assets work, protection, investment vehicles in Japan and elsewhere, along with market news and the odd non-financial article on life in Asia.

Constructive comments are welcome and please feel free to share anything you find useful. Yorishiku onegaishimasu!