You are on page 1of 24

Published by:

Book 1.indb 1 3/25/11 11:40:52 AM


Agensi Kaunseling dan Pengurusan Kredit
Aras 8, Maju Junction Mall
1001, Jalan Sultan Ismail
50250 Kuala Lumpur
Fax : 03-2616 7601 E-mail: enquiry@akpk.org.my

AKPK
First Edition 2011

The copyright of this book belongs to Agensi Kaunseling


dan Pengurusan Kredit (AKPK). This book or parts thereof,
may be reproduced, translated, or transmitted in any form
with prior written permission from AKPK only for the sole
purpose of education. No monetary gain in any form should
be made or derived, whether direct or indirect from such
reproduction.

ISBN 978-983-44004-2-2

Disclaimer:
The information contained in this book is solely for educational purpose. It is not
intended as a substitute for any advice you may receive from a professional financial
advisor.

Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any
person using the information in this book as a basis for making or taking an action.

While all efforts have been made to make the information contained in this book
accurate, AKPK seeks your understanding for any errors or omission.

The names and details of individuals in the real life cases have been changed to
protect their identities.

Book 1.indb 2 3/25/11 11:40:53 AM


Chapter

1 Cash Flow
Management

Book 1.indb 1 3/25/11 11:40:57 AM


Managing your cash is
important to ensure that
you have complete control
over your finances. As cash
is an exchange tool which
allows you to buy goods
and services, it is important
for you to first understand
your money managing
habits.

Do you normally run out


of cash before your next
paycheck arrives? Or are
you the type who has
more than enough balance
in your bank account?
Regardless of your answer,
this first step of a realistic
assessment will help you
analyze how much cash
you ear n against what
you spend. This simple
concept is called cash
flow management.

Analyzing your cash flow can tell you a lot about the nature of
your income, spending habits and lifestyle requirements. To further
understand what cash flow means, let us get started by learning
about cash flow management.

Book 1.indb 2 3/25/11 11:40:58 AM


WHAT IS CASH FLOW MANAGEMENT?
Cash flow management is the process of monitoring, analyzing
and adjusting your personal cash flow. Your personal cash flow
is made up of two main components; your income (inflows) and
your expenses (outflows).

Your income or cash inflows may consist of active income and


passive income.


Active I s derived from your employment or
income business ventures. The moment you stop
working or doing business, your active
income also stops. Some examples
of active incomes include salary from
employment and profits from businesses

Is cash derived from your savings or


Passive
income investments. Passive incomes are received
regardless of your employment status.
Some examples of passive incomes
include income from interest or profit,
rentals, dividends and royalties

Book 1.indb 3 3/25/11 11:40:58 AM


Cash outflows, on the other hand, include fixed expenses, variable
expenses and discretionary expenses.

Fixed
 Are expenditures of a fixed nature. These
expenses expenses are generally necessities and the
amounts incurred are normally the same
every month. Examples include housing
loan and hire purchase installments,
rental payments, insurance premiums and
childcare expenses

Are expenditures that vary from month to


Variable
expenses month. Like fixed expenses, most variable
expenses would also be considered
necessities. Some examples include food,
clothing, utilities, mobile phone bills and
essential household items

Are optional expenses. Most discretionary


Discretionary
expenses expenses are items which are considered
non-necessities or nice-to-haves. Several
examples include dining out, branded
clothing, air-conditioning, cable TV,
entertainment and non-essential household
items

Now that you have an understanding of cash inflows and outflows,


let us study its application through a cash flow statement.

Book 1.indb 4 3/25/11 11:40:58 AM


What is a cash flow statement?
A cash flow statement shows all your income (cash inflows) and
expenses (cash outflows) for a given period of time. It is a basic tool
to check your financial health and assess your financial position.

Proper management of your cash flow ensures that you always


have sufficient income to pay for all your expenses and puts you
in a good cash position.

What is your cash position?


If you receive more than what you have spent after deducting your
expenses, you have a surplus (positive) cash position. However, if
you spend more than what you get, then you are said to be in a
deficit (negative) cash position.

Total Cash Inflows > Total Cash Outflows = Cash Surplus


Keep up the good work!

Total Cash Outflows > Total Cash Inflows = Cash Deficit


You may want to review your spending

When your cash position is in a deficit, you will most likely


use borrowed money to subsidize the cash shortage you
are experiencing.

Spending exactly what you earn does not count as a good cash
position either. When you spend exactly what you have, it means
that you do not have any savings in case of emergencies. Imagine,
what would happen to your cash position if you lose your job or
earning capability?

Book 1.indb 5 3/25/11 11:40:58 AM


To be in a good financial position it is advisable to have cash
surplus at all times. A cash surplus not only allows you to keep
money aside for unexpected expenses but also gives you an
opportunity to build your investment. This will bring you closer
towards achieving your financial goals.

So how can you manage cash flow to achieve cash surplus?


One of the most effective ways is through the use of a budget.

What is a budget?
A budget is a plan for managing your cash flow and is used to
estimate your future income and expenses. To put it simply, a
budget lists all your expected cash inflows and outflows to assist
you to make prudent financial decisions.

Why do I need a budget?


How many times have you made ATM withdrawals only to realize
that you have spent all your money within a couple of days? Often
it becomes extremely difficult to remember where that money was
spent. Many people do not keep track of their finances and end
up spending more than they mean to. This is why a budget is
important.

Benefits of having a budget



Live within your means
Cultivate a saving habit
Save for financial emergencies

Enhance your net worth

Book 1.indb 6 3/25/11 11:40:59 AM


Live within your means
Needs and wants
 emember that your budget is based on your income and
R
expenses. As each persons income and expenses differ, your
budget should be based on your needs and wants.

How do you then differentiate between a need and a want?

 need is something you must have, that you cannot do without.


A
While a want is something you would like to have, which is not
absolutely necessary.

Some examples of needs and wants are as follows:

NEEDS WANTS

Food Fine dining

Shelter / Home Resort-like bungalow

Clothing Branded clothes

Quality time with family Overseas vacations

Car / Motorcycle Luxury / Sports car

Mobile phone Advanced full-featured phone

Computer Advanced full-featured


computer

As time evolves, your basic needs may extend to more than just
food, shelter and clothing. Your want today, may become a need
tomorrow.

Book 1.indb 7 3/25/11 11:40:59 AM


 ake this example. An individual 20 years ago did not view mobile
T
phones as a need. Conversely, in todays modern world, a mobile
phone is considered a necessity which makes it a need instead
of a want. However, when you choose a mobile phone that is
expensive and has all the latest features, you are shifting this
need into a want.

 he decision you make with regard to what you need or want will
T
directly affect your spending.

Delayed gratification
Delayed gratification means delaying your wants to a later period
instead of having it now. Whenever you intend to make a purchase,
especially when it is a want item, take time to think whether it is
within your budget.

Living within your means requires you to learn how to say no to


unnecessary spending. Look into substitutes for your needs and
wants especially if it does not fit your budget.

Ask yourself these questions before you spend:

I n s t e a d o f b u y i n g a c a r, w h y n o t u s e p u b l i c
transportation?

If you really need a car, can you consider getting a


second-hand one?

If you need a mobile phone or a computer, will a basic


model serve your purpose?

If you want branded clothing, can you substitute for


reasonably priced and good quality clothing instead?

Book 1.indb 8 3/25/11 11:40:59 AM


 budget needs to be
A
realistic and tailored
to meet your earning
capacity and spending
needs. Living on a
budget does not mean
sacrificing all your
luxuries. It simply means
that you will have to plan
and at times change
your perceptions and
spending habits.

Spending wisely
 key to a successful
A
budget is to spend less
than what you ear n.
When you have the urge
to buy something, pause
and ask yourself the
following questions:

Can I afford to buy it?

Do I really need it?

Is there something cheaper?

Can I delay buying it?

Book 1.indb 9 3/25/11 11:41:00 AM


Tips on Spending Wisely

TIME
Plan your purchases to avoid making
multiple trips to the stores

Optimize the use of your resources,


including fuel and time

Avoid getting caught in last minute


shopping frenzy

Stock up household items in advance


to avoid festive rush

LIST
Always have a shopping list to avoid
unnecessary buying

Avoid buying things you do not need

Always keep to your budget

Compare
Compare prices at various outlets before
buying

Keep a price book to track prices on


frequent purchases

10

Book 1.indb 10 3/25/11 11:41:00 AM


Passion for the high life
Age : 33 years old
Occupation : Medical Doctor
Marital status : Single

Dr Azam is young and successful. At only 33 years old he


seemed to have it all; two flashy cars, a beautiful condominium
and a flourishing career.

Dr Azam felt he deserved all the good things in life. He worked


hard and studied even harder to become a doctor. He was
convinced that he could afford everything money could buy. He
relied heavily on his credit cards and lived an extravagant lifestyle.
His passion for the high life was immeasurable. He loved the
attention he got from everyone when he stepped out in expensive
leather shoes paired with a designer tailored suit.

Dr Azam knew that with a 5-figure salary monthly as a specialist


medical doctor, he was well on his way to financial freedom. His
poor cash flow management and lack of savings did not worry
him. All he wanted was instant gratification from the toys he
bought with his five credit cards.

Dr Azam did not have a budget to track his income and expenses.
Due to this, he was soon unable to keep up on the installments
on his two cars and could barely make the minimum payment on
his credit cards. To make matters worst he was 3 months behind
on the rental of his exclusive condominium.

Facing eviction, Dr Azam was surrounded by creditors demanding


payment for all his outstanding debts. Due to defaults, one of his
cars was even repossessed. In no time Dr Azam was caught in a
tangled maze of debt, owing creditors RM120,000 on credit cards
alone. With bankruptcy looming ahead, Dr Azam decided to seek
AKPKs help.

11

Book 1.indb 11 3/25/11 11:41:00 AM


CULTIVATE A SAVING HABIT
A budget helps you develop a saving habit. Without a savings
plan, it will be harder to achieve your financial goals such as
buying a house or car, obtaining further education or even building
a retirement fund.

It is suggested that you save at least 10% of your income every


month. It is even better if you can save between 15% to 20%
because this will translate into more money for your future.

Guide
on cultivating a saving habit

1
Always pay  S ave at least 10% of your
yourself income
first
 M ake your savings automatic
through a salary deduction scheme
or other similar arrangement

2
Motivate Set meaningful and significant
yourself with a goals to motivate yourself to
financial goal save. You can set short, medium
and long term goals

3
Make After having saved the first 10% of
savings your income, gradually challenge
a challenge yourself to save a little more

12

Book 1.indb 12 3/25/11 11:41:00 AM


4
Put away E v e r y t i m e y o u g e t a n
surprises extraordinary income such as
a bonus or cash gift put part
of it into your savings account
immediately

If you get a salary raise, keep


to your current standard of living
and put the additional money in
your savings

Save for financial emergencies emergency buffer


In life there are many financial emergencies which may limit or
take away your earning capacity. Some even require you to come
up with substantial amount of money urgently.

The most common need for an emergency fund includes sudden


loss of income through unemployment and unexpected medical,
home and car repair expenses. If you lose your job you will still
have to continue paying your bills!

To cope with these uncertain situations, it is important to have


an emergency fund that will help you deal with such events. As
a general guideline, you should have an equivalent of at least 3
to 6 months worth of your basic living expenses. The last thing
that you want is to be forced to rely on a loan which could simply
compound the problem.

Apart from saving for financial emergencies, a budget can also


help you save for other big ticket items or special events while
enhancing your net worth.

13

Book 1.indb 13 3/25/11 11:41:01 AM


ENHANCE YOUR NET WORTH
A net worth statement is your financial scorecard which can be
used regularly to assess your financial standing. It serves as a
reference point in making money-related decisions and reports on
what you own (assets) and what you owe (liabilities).

Assets include items such as cash, savings, real estate, unit trusts
and shares while liabilities include all types of loans including
borrowings from family and friends, credit cards debt, payments
for rental and utility bills.

Your net worth can be enhanced by monitoring your expenses


through the use of a budget.

A budget helps you control your expenditure. This in turn enhances


your net worth by assisting you to invest and accumulate
assets.

Therefore, the key to enhancing your net worth is simply to spend


less and save more for your investment.

14

Book 1.indb 14 3/25/11 11:41:01 AM


Guide to calculate your net worth

Step 1 List the things of value that you own

Cash and its Investments, Retirement Properties Personal


equivalent, such as funds, such like houses, belongings
such as stocks, bonds as EPF and apartments that can be
savings and unit trust personal and land sold such
accounts and funds retirement as jewelry,
fixed deposits accounts gold, art and
antiques

Step 2 Total up your assets

Step 3 List the things that you owe to others

Loans, Credit card Taxes owing, Money owing Balance of


including your balances such as real to relatives, installment
student loan, estate and friends and payments for
bank loans income tax others consumer
and other goods such
loans as furniture
and TV

Step 4 Total up your liabilities

Step 5 Assets minus liabilities


If the number is positive, pat yourself on the back. You should plan
on how to increase your net worth. If it is negative, do not despair,
because you can take actions to improve your financial position

15

Book 1.indb 15 3/25/11 11:41:04 AM


How do
After knowing the benefits of having
a budget, you are now ready to

I set a
create your own. All it takes are
three simple steps:

budget? 1. List down all your sources of


income
Your salary should be net
of EPF, tax and SOCSO
deductions

2. List down your expenses


Your expenses should include
fixed expenses, variable
expenses and discretionary
expenses
Here you need to pay yourself
first as savings (minimum
10% of your total income)

3. Determine your net cash flow


position
If it is a surplus, well done!
Try to keep to that budget of
yours in your actual spending
If it is a deficit, revise your
budget by cutting back on
discretionary expenses until
you get a positive net cash
flow position
Ideally you want a surplus
to be able to build up your
emergency fund

16

Book 1.indb 16 3/25/11 11:41:05 AM


As you can see, it is not difficult to create a budget. However,
successfully maintaining and sticking to one requires a little more
time and effort.

You also need to be realistic and flexible in your approach. If you


have a moderate income, do not expect to save a lot of money
in a short period of time. Also there may be times when you need
to revise your budget to cater for unexpected expenses.

When you are in a good financial position with cash flow surplus,
then you are ready to invest. There are many types of investments,
including real estate, stocks and bonds in the market. Returns on
these investments vary in tandem with the risks associated. If you
plan on being an investor, be mindful of your risk appetite levels
before investing.

Invest only on products that are familiar to you

Do your homework and make sure you understand the


risks involved

Do not put all your eggs in one basket. Remember,


spreading your money across a variety of investments is
the key to spreading your risks

FINANCIAL SCAMS
When investing your hard earned money, be extra careful of get-
rich-quick schemes. Such schemes promise high returns with little
or no risk. These get-rich-quick schemes are frequently promoted
through various channels, with internet and short message service
(SMS) being the more common platforms. The next time you come
across these get-rich-quick schemes, be vigilant and remember
that if it sounds too good to be true, it probably is!

17

Book 1.indb 17 3/25/11 11:41:05 AM


Tell-tale signs of financial scams:

Promise of high returns of between 5% to 20% a month


with little or no risk

The offer is for a limited period only and you are asked to
sign up immediately

The scheme is in another country and you cannot check


on its office or confirm its status

You are asked to give confidential information such as


your bank account number

You are asked to deposit a small sum of money to meet


the processing and administrative fees

The golden rule is not to be greedy. Always check with friends,


family and professionals on whether such investment opportunities
are genuine or otherwise, even if it is recommended by someone
close to you.

Find out more about the offer. Be suspicious particularly of


investment that offers high returns, low risk and is free of
investment costs, as it is unlikely that a business venture can
provide all these.

Browse websites of
BNM (www.bnm.gov.my) and SC (www.sc.com.my)
for further information

18

Book 1.indb 18 3/25/11 11:41:06 AM


takeaways
A cash flow statement shows you
where your money is coming from
and where it is going over a period of
time

A budget is simply a tool to help


you manage and track your cash flow
more effectively

A budget is the best tool to ensure you


spend and live within your means

Having savings is very important as it


will help with emergencies

A net worth statement gives you a


snapshot of your financial position at
any given time and serves as a tool to
help you track your progress

19

Book 1.indb 19 3/25/11 11:41:07 AM


Checklist
Draw up your monthly cash flow
statement showing all inflows and
outflows

Come up with your budget by


setting aside at least 10% of your
income as savings

Draw up your net worth statement


to see how much you are worth
now

Appendix 1.1 : Sample of budget and cash flow statement


Appendix 1.2 : B
 lank template of budget and cash flow statement
Appendix 1.3 : Sample of net worth statement
Appendix 1.4 : Blank template of net worth statement

20

Book 1.indb 20 3/25/11 11:41:07 AM


Self Assessment

1. Which of the following are the main components of


cash flow management?

a. Income and expenses


b. Assets and liabilities
c. Debtors and creditors
d. Profit and loss account and balance sheet

2. A budget helps you to _________

a. live within your means


b. achieve financial goals
c. set aside money for savings
d. all of the above

3. Why is savings important?

a. To plan for your retirement


b. To prepare for emergencies
c. Down payment to buy your first house / car
d. All of the above

4. How many months of living expenses are recommended


for your emergency fund?

a. 1 - 2 months
b. 3 - 6 months
c. 8 - 9 months
d. 12 - 24 months

21

Book 1.indb 21 3/25/11 11:41:07 AM


5. What is your net worth?

a. My total liabilities plus total assets


b. My total income plus total expenses
c. My total asset minus total liabilities
d. My total income minus total expenses

6. What is the minimum monthly recommended percentage


of your income to be set aside as savings (apart from EPF
contribution)?

a. As and when you have it


b. At least 50% each month
c. At least 10% each month
d. None of the above

7. What is a good financial habit?

a. Having monthly repayments of more than 40% of your


gross monthly income
b. Tracking your expenses and cash flow
c. Living lavishly
d. Paying the minimum amount on your credit cards

Check your answers at the end of this book

22

Book 1.indb 22 3/25/11 11:41:08 AM

You might also like