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Budgeting: Balance Your Spending

“My money keeps spilling out like water.”

Many of us have experienced the frustration of having too many expenses to track. We have to pay for housing, utilities, taxes, transportation, food, the list goes on. Sometimes we can’t catch a break despite bringing in a reasonably good income.

It’s normal to feel overwhelmed about expenses from time to time. But when the feeling expands to a paycheck to paycheck lifestyle, you need to start a budget.

A personal budget is your own spending plan. It’s necessary for a myriad of reasons. Budgeting helps you spend less than what you bring in. It helps you identify problem areas, such as impulse buys. It helps you prioritize your spending and manage your money. It also helps you keep track of your financial goals: are your savings progressing towards your short-term and long-term goals?

In spite of its importance in a solid financial plan, many people avoid budgeting. The word is unfortunately associated with deprivation and excessive cheapness. But a good budget means living well rather than living poor. A good budget, like most aspects of life, requires us to create balance.

Before crafting a personal budget, we first need to differentiate a want vs. a need.

Imagine three buckets. Bucket #1 is for compulsory expenses, such as food, rent or housing, and “overhead” costs like utilities. Generally, bucket #1 is categorised under fixed expenses and there shouldn’t be too much fluctuation of cost between months.

Bucket #2 is where you drop your investments and savings. Bank deposits, retirement funds, property investments, bonds, and stocks all belong to this category. Lastly, Bucket #3 is for discretionary spending, such as travel, shopping, hobbies, and nights out.

It’s easy to guess which are “wants” and which are “needs” isn’t it? Bucket #1 and Bucket #2 contain “must haves” while Bucket #3 contains “nice to haves.” While items in Bucket #3 are mainly “wants” and “nice to haves,” you still need to moderately indulge in them to live a happy, balanced life.

We also need to separate personal assets and liabilities. Assets include your house or apartment, your vehicles, your checking and savings accounts, and your investments. Alternative investments such as art and jewelry can also count.

Mortgage and car loans are liabilities, but will be considered assets when paid in full. Credit card debt and personal loans tread on more dangerous territory, as their interest rates are high and they don’t become assets when paid in full. Also, beware of indulging in too many “wants.” Eventually most of them depreciate to nothing, becoming sunk cost – when the money could have been used to purchase assets.

Read also: 5 Useful Tips To Keep Your Business Finances Healthy

On to business. Let’s discuss the three steps of budgeting:

#1 Start by tracking your spending

There are many ways to keep track of your expenses – there is no correct method. You can use a notebook and pen, a Word doc, an Excel spreadsheet, or even personal finance apps like Mint and Toshl Finance. What matters most is consistency.

Note down all your spending, even small ones like your daily latte – the point of this first step is to know where your money is going. Update your budget regularly so you won’t forget anything. Use accurate descriptions for your purchases, such as groceries, clothes, etc. Again, you want to know exactly where your money is going.

Tracking your spending is essential as it helps you identify problem spending areas and readjust your priorities. It also helps you tailor your own spending ratio.

#2 Analyze your expenses, prioritize, and create a spending ratio

Remember the three buckets? Most of your income should go to Bucket #1 (Compulsory Expenses) for food, lodging, and utilities. Try to achieve a good balance between Bucket #2 (Investment/Savings) and Bucket #3 (Discretionary Spending), especially if your notes on expenses show you are overindulging. Spend less on “wants” and think about your future financial goals without severely depriving your fun.

Figure out a ratio for where your income should go. This Forbes article suggests a 50/20/30 ratio for Buckets #1, #2, and #3. A Google search of the “personal budget chart” shows many different approaches to personal budgeting. The key here is finding the ratio that works for you. It is you who decide what your priorities are.

Can’t calculate a ratio? Don’t fret. Just try a ratio combination and see what fits your personal expenses and needs. Make adjustments if you need to.

Read also: 5 Steps For Better Cash Flow Management

#3 Track your budget overtime

Now that you’ve created a budget, here comes the most crucial step: sticking to it. Do your utmost to follow the spending ratios you’ve set up – with an emphasis on reasonably saving and investing your income. You can only gain the benefits of a personal budget if you track your progress and make sure you are spending below your income. Your budget acts as a progress report: are you prioritizing well and saving enough?

If you find it difficult to stick to a budget, you may be spending too much on unnecessary items – remember future goals like owning your own home! At the same time, if you’ve only started budgeting, relax. As time goes on, you’ll see a difference in your spending habits overtime. Check the difference in spending after 3 months. You might surprise yourself. Just stick with it.

This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. 

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

Success Story – P2P Loan To Manufacturer

This article first appeared Lets Crowd Smarter, a digital publication about crowdfunding and investing in Singapore and Asia.

Not all crowdfunding schemes are fraudulent. We (the Let’s Crowd Smarter Team) have invested in over 50 crowdfunding schemes across different platforms and our overall experience has been great.

Yes, there are a few problem loans whose repayments are always late. And we’re lucky not to have encountered any outright default yet. But we have seen more successes than failures.

We believe that as long as investors stick to the more established crowdfunding platforms (such as Funding Societies, MoolahSense, Capital-Match, Crowdo and New Union) and have a widely diversified portfolio, the overall returns should be positive.

As an example, our p2p loan portfolio is earning a cash return of about 1.5% per month, or about 12% so far this year.

Read Also: Spotting Red Flags in Crowdfunding Schemes

Crowdfunding Success – A Real Story

Here, we’ll share with you a crowdfunding success story – a p2p loan that we participated with Funding Societies in December last year. The effective interest rate was a cool 23.6% per annum. (We also have similar successes with other platforms and will share them next time.)

The loan ID is SB-1512005 but we’ll respect the borrower’s confidentiality and not disclose its identity. Below are some of the key features of the loan.

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To summarize, this company is borrowing $100k as working capital for a $780k project. It promised to repay over 6 months. Effective interest earned by the lender is 23.6% per annum. As this is a 6-month loan, the actual  interest earned is roughly half of that.

Funding Societies provided further financial information and comments on the borrower. We did a quick review and find the risk to be acceptable. Hence, we decided to lend $1,000 on this loan in December last year.

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Prompt Repayment

Over the next 6 months, this borrower repaid promptly every month. The final repayment was in June 2016. On this loan, we earned the 23.6% effective interest rate per annum – exactly as promised.

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Verifying Our Return On Investment

Now let’s verify that we are indeed earning 23.6% effective interest per annum.

But before we do that, we’ll need to explain the difference between effective and simple interest rates.

Effective interest rate refers to the interest earned on the outstanding loan. When the borrower repays its loan every month, the outstanding loan balance declines. The interest earned by this declining loan balance is known as the effective interest.

On the other hand, simple interest is basically the total interest earned by the loan as a percentage of the initial loan amount. It does not take into account the declining loan principal or the repayment every month.

We prefer to use effective interest rate. Using Excel’s IRR function as shown below, we easily show that the effective return is indeed 23.6% per annum.

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Is it really so easy?

If crowdfunding is so easy, why are there still plenty of negative news about defaults and frauds?

In our view, most of these platforms that ran into trouble are poorly managed. Many are fly-by-night operators that nobody has heard of. Their loan underwriting process is not credible at all. For the recent First Asia Alliance case, there were so many red flags, including the fact that the director of the crowdfunding platform is also the shareholder of the investee companies.

But there are also well-managed crowdfunding platforms that already have or in the process of getting CMS licenses from MAS. This includes Funding Societies, Capital Match, MoolahSense, New Union and Crowdo.

We (at Let’s Crowd Smarter) are comfortable with and have invested our own money with this second group of crowdfunding platforms. Overall, our investing experiences have been great. Of course, we do have some problem loans and late repayments, but these usually form less than 10% of our total portfolio. Success stories still far outnumber the failures we had.

If investors choose the correct platforms, investing into crowdfunding schemes can generate attractive returns without too much risk as shown in this example.

Read Also: Traits Of A Successful Trader

Funding Societies is a DollarsAndSense Brand Connect partner. Funding Societies is Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

5 Steps to Digitise Your Business in a Tech-Savvy World

Today’s technology grows at such breakneck speed. Compare the gadgets and online tools you are using today to ten, or even five, years ago. Technology is inseparable from daily life. Take online shopping. These days, many people prefer it to brick-and-mortar shops.

Business owners must adapt to the new digital age to stay afloat and thrive. Everyone needs to digitise their businesses. How to do so? Here are 5 steps:

Set a goal

Never build anything unless there is a set goal. Why do you want to digitize your business? What are your goals? Do you want to gain more sales? Do you want to create awareness for your business? Setting goals will help you decide which digital strategy you need to utilize.

Create your own sites

Invest your capital in creating your own business website. Make the address as simple as possible, preferably using your brand name as the web address. Prioritise design. Don’t hesitate to hire a web designer if you can’t do it yourself. Your company website is your business face. People will assess how professional your business is based on your site interface.

It doesn’t stop with design. You also need clear and useful content on your business website. Make sure that your content is related to your target market. You will gain more leads if you have high-quality content aimed to your target market.

Read Also: 5 Tips to Create & Manage the Best Business Website on a Budget

Use the power of social media

Now that you have your own website, you need to spread the word. This is where social media will help you in the most effective way. Create a Facebook page, an Instagram account, a Twitter account, even a LinkedIn page – utilise as many social media platforms as long as the platform is still within your niche and your company has the capability to maintain these accounts.

Invest in advertising. You can also broadcast your website’s high-quality content via social media accounts for branding.

Create a mailing list

Creating a mailing list will help you to keep in touch with customers. Hold promotions and discounts to attract more people into subscribing. You can also use referral campaigns to gain more subscribers from loyal customers.

Arrange your projects online

If possible, start digitising manual processes. By making your company more digital, you can cut down on inefficiencies and evaluate the overall workflow. Schedule periodic reviews to continue streamlining and evaluating your operations to keep your processes up to date.

Digitising your business is easier than you think. And the benefits are many. Adapting to digital technology will lessen the possibility of human errors and develop more efficient business processes. In the long run, digitising your business saves both time and money.

Read Also: Grow Your Business Without Breaking The Bank

This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. 

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

4 Things About Your Personal Finance To Handle Before Thinking Of Starting Your Own Business

Prime Minister Lee Hsien Loong made a trip down to Silicon Valley earlier this month to visit some of the top start-ups in recent years. During his trip, he met some of the top entrepreneurs in the world over including Facebook’s Mark Zuckerberg and Tesla & Space X CEO Elon Musk.

Starting your own business is not easy, especially if you are not born with a silver spoon. Aside from needing a top notch idea, a great team for execution, the perfect timing, the right investors and a nice dose of luck, you also need to get your own personal finance in order…first. Failure to do so would cause unnecessary stress to an already stressful career.

Before you think of taking the plunge to be your own boss, here are some personal finance matters that you should consider first.

Read Also: 5 Signs You Are Ready To Change Your Job

1. Can You Embrace A Simple Lifestyle?

When you run your own business, a large part of the effort you put in is to grow the business for tomorrow. Start-ups or new businesses do NOT work for today. They work for tomorrow, while balancing today’s need.

When you hustle, you hustle for tomorrow.

This has two main implications.

The first implication is that if (and that’s a big “if”) the business succeeds, you get to enjoy the long-term value that it brings to you, its shareholders. That could be in the form of passive income to shareholders or a big exit through an eventual sale of the business.

The second implication is that you are not going to be paid well (if any) for running this business of yours today. And that “today” can easily last 4 to 5 years.

Forget about flashing your CEO namecard at clubs or buying expensive bottle of drinks for your entourage, you wouldn’t be able to afford it. Those restaurant meals that your friends are enjoying may also be out of the question.

Rather, homecooked dinners followed by cheap coffee are likely to be the norm. So would squeezing onto the train to get to work each morning.

Billionaire Elon Musk once lived on about $1 per day in his college days. The reason for him doing so was to test himself if he really had what it takes to be an entrepreneur, and be able to survive under extreme circumstances. Elon Musk rational was that if he could survive on $30 per month on food, then it shouldn’t be too difficult for him to earn and survive on that amount as an entrepreneur.

He could. Can you?

2. Are You Able To Endure Being Underpaid?

Businesses take time to grow. If you are creating a start-up (i.e a business that nobody has done successfully), you will need even more time to grow it.

People who work regular jobs expect to be paid salaries that commiserate with their average output. When we are worth $3,000 per month as a fresh graduate, we expect to be paid that amount. When our skills and experiences increase, we expect to be paid more.

When you are working on your own business, this logic needs to be thrown out of the window. Even if you are the super employee/boss of the company doing everything from closing business deals, delivering great products and services to your clients and being a one-man accounting team, you might still be paid $2,000 per month – for doing a great job.

You might be working harder and smarter than all of your peers and still be earning the least amount of money among everyone whom you know, at least for the first few years.

Can you handle that?

3. Can Your Family Cope Financially With Your Decision?

Most of us have financial commitments in life. Some of these commitments are long-term, such as paying for the home mortgage and taking care of the needs of our children and elderly parents.

Like it or not, financial commitment to our family is one thing that we cannot get ourselves out from. You might be able to live a simple life, but your family would need to be able to cope and live with that decision you are making.

The hard and unfair truth is that not all of us are born into family that can manage the stress of financial uncertainty.

4. Do You Have A Strong Savings Plan?

Even if your business eventually turns out to be sustainable in the long run, personal cashflow challenge is one aspect that you cannot ignore.

Most businesses have cashflow challenges. Account receivable is one area that finance managers are always keeping a lookout of because poor management of your cashflow can potentially sink an otherwise profitable business.

From an individual standpoint, there might be days where you might need to allow your business to owe you unpaid salary in order to stay afloat. Your personal savings will have to step in for these challenging days in order for you to tide over short-term cashflow difficulty.

Read Also: 5 Reasons To Quit Your Job Even If You Have Not Found A New One

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

8 Things to Ask Yourself Before Applying for a Business Loan

These days, there are several resources available for business loans. But while the options exist, receiving funding is never easy – especially if you are part of a small business. Then there’s the evaluation bit. Lenders review your application thoroughly before they can deem you worthy and disburse the necessary funds. (For more information on the loan evaluation process, see this article).

Obviously, you want to maximize your chances of loan approval. Ask yourself these question before you prepare your loan application:

  1. Why do I need a business loan?

Every business loan consideration should start with this question. Do you really need a business loan? Of course, there are many excellent reasons why a business loan would be beneficial: you are planning an expansion and need financing to make it happen, you need to purchase equipment to improve your product, you need to purchase more inventory from your supplier, or you just need an injection of working capital.

Feeling unsure if your “why” passes the test? Here’s a good rule of thumb: ask yourself if a business loan will make your business grow. If the answer is yes, go for it. If not, you may want to evaluate some of your priorities.

Remember: whatever your reason for a business loan application, your lenders will question you about it. Be sure you can explain your reasoning eloquently.

  1. How much money do I need?

Like question number 1, lenders will ask loan applicants this question. Do ensure that you have spent enough time making proper calculations. If you are buying equipment, research the cost. Create financial projections.

Asking for too little will create working capital problems and might make your company financials suffer. Asking for too much makes you look as if you haven’t done the necessary research. Worse, lenders may think you lack credibility.

  1. How are my financials?

Obviously, your lenders will want to know if you can repay your loans. Otherwise why would they bother? So make sure you have a healthy cash flow and solid financial figures.

It’s very likely that you will be asked for your company’s balance sheets, income statements, cash flow statements, and bank statements so your lenders can analyze your situation.

Take the time to create accurate projections. Try to create a debt repayment plan as well.

  1. Do I have other debts?

Related to number 3, lenders will want to know all about your credit history. They want to ensure that you can repay your loan, and if you have other unmet obligations hanging over your head, lenders will view your other debts as a danger sign.

  1. Which lender is most appropriate for my credit needs?

Take the time to choose a lender that suits your needs. Research various loan products and structure, take a look at loan interest, etc. There are different lending institutions for different needs, such as large and small banks, financial institutions, government-backed loan packages, and alternative lenders, such as crowdfunding.

To read more about finding business financing for small businesses in Singapore, click here.

  1. Do I meet my chosen lender’s requirements?

Business loan applications goes both ways. While you need to choose the most suitable lender for you, it is crucial that you meet their requirements. Otherwise, sending a loan application would be a waste of time. And it can hurt you, because the next lender you apply to might question why you were rejected for other business loans.

  1. What’s my business plan?

Lenders will ask for your business plan. They want to know details on how you will use the loan money, what your plans for the future are, and whether you will ultimately repay your obligations.

A strong business plan should include past and current financial statements, along with future projections. Other elements you may want to consider are: company and product description, market analysis, and company strategy for growth.

  1. Do I have all my documents in order?

If you have all your documentation ready, the application process will be much smoother. You will also look prepared to your lender.

While required documents vary across different lending institutions, every lender will ask for financial statements. In addition, you may be asked for your credit report (personal and/or business), tax returns, bank statements, collateral information (depending on loan type), and legal documents (business licenses and registrations, articles of incorporation, etc)

Ultimately, applying for a business loan is all about preparation. Good luck!