Financial Planning (4) - How much can you afford to save?

The amount that you can save depends on your income (combined with the income of your spouse) and the amount that you spend.

Some of your spendings are fixed. You have to make monthly repayments on the loans that you have taken to buy your home, car or furniture. If you do not make the payment, you are charged a high rate of interest, which can be a burden.

You also have to spend money on transport, food, clothings, utilities, telephone, medical expenses and other essentials. You can spend a smaller amount by being frugal, but there is a minimum sum to be spent. If you have more members in the family, the spending increases proportionately.

Tuition for the children and employing a maid are expensive items. Are they really necessary? Can they be avoided?

Spending on credit should be avoided. The interest charged on credit card can be 2% per month or 24% a year. This is too high and can be a heavy burden.

After setting aside the fixed commitments and the essential items, you have a remaining sum. You can decide on how much to set aside as savings for the future and how much should go into discretionary spending.

Some people make the mistake of setting aside too much of their monthly income in life insurance savings. This forced savings take a large part of their earnings. When they are unable to meet the premium payments, their policies lapse and they forfeit a large part of the premiums that have been paid. This should be avoided.

To recap: Have a budget to allocate your savings into fixed commitments, essential expenses and voluntary expenses. Avoid having fixed commitments (e.g. loans installments and life insurance savings) that may be difficult to service.

Tan Kin Lian