No lengthy formal
introduction required. In simple words, expenditure
or expense is money going out.
For our purpose, there are
three types: fixed, variable and emergency.
Fixed expenses are those that mostly resulted from you signing on the dotted line.
Housing loan, car loan and
any contract that has a locked-in period like maybe your internet plan or
credit card's 0% instalment payment.
Most of these contracts are
quite tricky to disengage yourself from without incurring extra costs and acute
headache.
Let me give you an example,
the housing loan. Let's say you lost your job. For you to discharge your
housing loan, you need to sell the house.
What if during that time the
economy is also in recession? You can choose to let the bank foreclose your
house but that would tarnish your financial rating. You will have problem later
to get new loans.
The point I’m trying to make
is, think carefully before you commit yourself to a fixed expenditure. In the
case of a house, maybe instead of buying you could rent. Even though rental is
also a fixed expenditure but it is an easier contract to terminate.
Please don’t get me wrong. I
am not saying that you should not buy a house. What I am saying is you should
not buy a house just because your BFF bought a house.
Always answer these
questions before you sign on the dotted line:
- Are
there any other alternatives?
- Is this
the best option?
- What is
the exit strategy if I can't afford to pay?
Variable expenses are your day to day expenditure.
Buying clothes, handbags,
shoes, food are under this category. You need to pay close attention to this
area because this is where impromptu and normally illogical spending happened.
"But it was on
sale!!" Sounds familiar?
Emergency expense is self explanatory.
If you don't manage this
well, it could lead you to financial ruins. Be warned!
I've watched enough Korean
drama series to know that a lot of people were forced to turn to loan sharks
during emergency. A loan shark is a person or body that offers loans at
extremely high interest rates.
Once you get in, it is quite
difficult to get out. Since their businesses are flourishing all around the
world, I believe the threat is very real. The scriptwriters are not making it
up!
So keep this in mind when
you wish to buy another pair of shoes, handbags, or latest gadgets that you can
live without:
- Do I
have enough in my Emergency Fund?
- Should
I set aside the money for emergency instead?
Homework: Go through your Liability List. Identify whether
the expenses resulted from the list are fixed or variable. Start to think of
ways to reduce your expenditure (both fixed and variable).
Do you have enough savings
to cater for any emergency expenses? If not, do you have family support in the
event of emergency? If not, what are you going to do about it?