In the second instalment of articles from our Guide to Financial Planning in Hong Kong, we discussed why having a plan is essential when it comes to managing your finances, knowing what you want to achieve with your money and establishing a route map of how to get there.
Your budget is an essential part of your route map; trying to navigate your financial life without a one is like getting on a plane without a pilot; the chance of getting to your destination is unlikely.
Budgeting in Hong Kong?
The high cost of living arguably makes budgeting in Hong Kong more important (and difficult), as it is easy to spend more than you intend to if you’re not careful. We often find that younger clients, who may be starting a family in Hong Kong, struggle most in this area as there are lots of new and unexpected costs involved.
A budget should not be viewed as negative; you should view it as a tool which will help you achieve your financial goals. It does not have to be restrictive to be effective, but it must be honest and realistic. It may take some time to build into a habit of checking and working to a budget, but the results will be worth it. The key to sticking to a budget is making sure you can track everything, and we will look at some options to help with that later.
5 Easy Steps to Create a Budget
1. Consolidate Your Financial Paperwork
Before getting started, gather up the last couple of months’ information of everything you’re going to need, including:
- Bank statements
- Credit card statements
- Utility Bills
2. Calculate Your Income
How much do you expect to receive into your bank each month, net of MPF or ORSO contributions? Do you receive rental income from a property you own?
If your income is not fixed (perhaps you are freelance or work is seasonal), consider using the lowest earning month from the past year, or an average of 12 months.
3. Draw up a List of all Your Monthly Expenses
Going back through your statements, note down of all your expenses in different categories, to come up with an “average” for each category across the 2 or 3 months you have a record from. Distinguish between fixed and variable expenses, and whether essential (Rent/Insurance) or discretionary (Eating out/New Clothes). The list should include things such as:
- Tax *
- Rent or mortgage payments
- Groceries & Utilities
- Cleaner/Domestic Helper/Childcare
- Entertainment (Eating out/Drinks) & Holidays
- Subscriptions (Gym, Club, Netflix, Spotify etc)
- Transport & Motoring expenses (Tax, car parking, insurance)
- Debt Repayments (Mortgage/Credit Cards/Loans)
* We recommend treating Hong Kong tax as a monthly expense of 15% of your gross monthly salary and transferring this into a separate account.
Now you have some amounts you can start assigning monthly values to each category. Start with the fixed expenses and then work on estimating your average monthly spending on the variable categories.
4. Calculate Monthly Totals
If your income is higher than your expenditure, then you’re at a good starting point. The surplus funds should be used to increase debt repayments (credit cards being a priority) or increase savings for your future (perhaps starting a TVC Scheme or setting up an investment account).
Consider implementing a 50-30-20 budget whereby your fixed and other unavoidable expenses make up half of your spending, 30% can be discretionary (entertainment, drinks/dining out etc) and the final 20% should be put towards savings which can be invested for the future.
The savings element should always take priority over the discretionary part of your budget, so if one month you find your costs are more than 50%, you should make cuts to the discretionary categories, not cannibalise your savings. You should use these savings to first build up an emergency fund of at least 3 months’ expenses, which can be easily accessed if you lose your job, or to cover larger unexpected costs.
That being said, debt repayments should take priority over savings, except where the interest rate on the debt is lower than the expected rate of return on the savings. This is likely to apply only to mortgages or low-cost personal loans. Credit cards should be paid off in full each month, outstanding balances along with other “bad debt” should be paid off as quickly as possible.
If your expenses are higher than your income, then you are overspending (any debt will be increasing) and need to make some adjustments to the expense’s category.
5. Managing your expenses
Where you have established that your income is not covering your expenses then you need to revisit your variable expenses to find areas where cutbacks can be made.
If you are in debt, discretionary spending should be reduced as much as possible until the debts are repaid. Cancel/freezing gym or club memberships for a few months, eat out less and look at switching utility providers. Did you find any recurring expenses on your statements that are subscriptions for things you no longer use?
Once under control and expenses are lower than your income, your aim should be to get the savings category up to 20% rather than increasing spending in other areas.
Make it Stick
The key to sticking to a budget is being disciplined in tracking your spending so you can keep a check on where you are up to throughout the month and the easier this is, the more likely you are to do it.
Most people always have a smartphone with them, so we recommend using one of the free apps which are available such as Pennyworth Expense Tracker, Pocket Expense or Monny.
These are easy to set up by entering the numbers from the budget for each category, and very quick when it comes to logging your transactions throughout the day. Consider entering all your recurring (direct debit) payments at the beginning of each month so you don’t miss them out.
Knowing you’ll need to enter the transaction after buying something and that it will affect your budget numbers can help to make spending a bit more of a conscious decision.
How can a financial adviser help?
Once you’re up and running and have a good understanding of your monthly cash flows, what next?
As financial planners in Hong Kong, our clients often find the time spent with us on cash flow forecasting the most valuable. We use sophisticated software based upon data that clients input from their own budgeting information.
The software can then tell us, based on current asset levels and savings rate, whether the individuals are on track to achieve their goals such as retiring at a certain age with a sustainable income for life. We can very easily explore different scenarios to see whether retiring early is an option, or if you could afford the holiday home on the Mediterranean.
Any savings that are not part of your emergency fund can be invested, and we can offer long-term, low-cost investment portfolios to facilitate this. We often provide second opinions and recommendations of existing arrangements.
We hope you find this article useful and that these tips can help you reduce your debt or get on track to achieving your savings goals.
Feel free to share if you think others may also find it helpful.
If you would like any help with anything we’ve discussed, then do get in touch!