Build a statement of the money that came in and went out over the last three months.
Set aside half an hour, open your banking app, and download the last three months of statements for every bank account and card you use. With those open, you can build a cash flow statement: a record of the money that came in and went out over a period, and the gap between them.
Most people know their salary exactly, but few know what they spent last month or whether anything was left over. Without a statement, the only clue is the balance in your account just before the next payday. Three months of statements give you a much clearer picture than that.
Income means money you actually received. For most people that is take-home pay, the amount paid into your account after any deductions, which can be smaller than the salary in your contract. Your employer pays CPF contributions to the CPF Board, and the total is made up of the employer's share and the employee's share. Some low-wage employees have no employee's share, although the employer still pays its share. Check the CPF Board for the current wage levels. Lesson 2.1 explains how gross pay becomes take-home pay. Add any other income that arrived in the three months: money from a side job, rent from a room, a bonus paid within the period, or regular money from a family member.
Leave out transfers between your own accounts. Refunds are also not income. Treat a refund as a reduction in the spending it reverses. You should end up with one income figure per month, which gives you three income lines.
Darren, 27, takes home S$4,200 every month (figures made up for the example). He also tutors at weekends, which brought in S$400 in January, nothing in February and S$500 in March. His income for the three months was S$4,600, S$4,200 and S$4,700.
Go through each statement line by line and put every outflow into one of three groups.
Fixed costs stay the same, or nearly the same, every month: rent or home loan, phone and internet, insurance premiums, loan repayments, money given to parents. Variable costs are everything that changes from month to month: food, transport, shopping, entertainment, gifts, travel. Savings is money moved to a savings account, an investment account or a fund for a goal.
Watch for two traps. The first is double counting. If you pay your card bill from your bank account and also count the purchases on the card, you count the same spending twice. Count the purchases from the card statement and ignore the bill payment. The second is cash. A cash withdrawal counts as spending, usually variable, even when you can't remember what the cash was for.
Every outflow should end up in a group. If a few small items are hard to place, put them in variable costs and move on. A figure that is roughly right is far more useful than a perfect one you never finish.
Darren's fixed costs are the same each month: S$900 rent, S$500 to his parents, S$250 for his study loan, S$150 in insurance premiums and S$30 for his phone, a total of S$1,830. His variable costs were S$1,600 in January, S$2,700 in February and S$1,550 in March. February was high because of Chinese New Year, with red packets, visits and new clothes. He moves S$500 to savings each month.
Total each line across the three months and divide by three. That gives you average monthly income, average fixed costs, average variable costs and average savings. Then work out your surplus: average income minus average fixed costs minus average variable costs. If the result is negative, it is a shortfall.
Darren's income totals S$13,500 over three months, an average of S$4,500 a month. His variable costs total S$5,850, an average of S$1,950. His surplus is S$4,500 minus S$1,830 minus S$1,950, which is S$720 a month.
You use three months because a single month misleads. A festival, a wedding gift or a trip can make a normal month look like a crisis, and a quiet month can make things look better than they are. An average over three months gives a steadier figure. In February alone, Darren's income was S$4,200 against spending of S$1,830 plus S$2,700, which is S$4,530, a shortfall of S$330. Judging from February only, he would have concluded he was overspending.
His January surplus was S$1,170 and his March surplus was S$1,320. S$1,170 minus S$330 plus S$1,320 is S$2,160, which is S$720 a month, the same answer the averages give. Over three months, he is not overspending.
Don't subtract savings when you work out the surplus, because savings come out of the surplus. Put your savings figure next to the surplus and compare the two. If your savings are less than your surplus, the difference stayed in your accounts without a purpose. If your savings are more than your surplus, you drew down your cash to do it.
Of Darren's S$720 a month, he saved S$500 on purpose. The other S$220 a month sat in his current account and drifted.
The surplus pays for every other layer of the system: the emergency fund in Module 3, insurance premiums in Module 4, and debt repayments and investing in Module 6.
A finished statement fits on one screen. Put the three months side by side, with the income line, a total for each of the three spending groups, and an average column. Your average monthly surplus or shortfall goes at the top in large type.
Once your number is at the top of the sheet, keep it in view. Lesson 2.2 uses it to set the spending plan you will actually follow.
Fill in the three-month cash flow statement. Write your average monthly surplus or shortfall at the top.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).