Seeing the final blog entry of 2010 still manifesting itself on the main page of my blog is an embarrassing testimony to my failure in meeting targets, especially when it comes to improve writing skills. Despite having a great year at work, only one out of 5 goals has been fully achieved, which is to secure a job, and it is now sponsoring me a longer term visa to remain in the UK, and to reach saving target, despite the latter being a short-lived achievement due to unforeseen circumstance. 

Without dwelling on the details of these failures generated in 2011, I would like to move towards deriving a clear, and hopefully a winning strategy, that would steer 2012 into a even greater year than 2011.

My experience in writing resolutions in the past two years has made me realised that there is a need to distinguish between things I want to do and a mission statement that serves as a guidance to achieving goals.

While my focus in the past – listing things I want to do, for instance, number of countries I want to visit and number of books I want to read - has actually helped my otherwise less-disciplined time management to become more properly structured and properly utilised, this approach hasn’t vastly exploited my individual potential.

Joining my company in the past year and having the opportunities to work with many of my colleagues whose first jobs are with my company, I came to observe that these younger generation is more inclining to committing personal financial suicide than me and most of my peers back home who are now mostly into their 3rd or 4th year of employment. Worse, to be informed that some are still depending on parents’ financial support occasionally was beyond my comprehension. I don’t think it is the age factor, but the upbringing background and the society seasoning have definitely equipped myself with a better personal finance management.

Witnessing my co-workers chasing luxury and the in-my-opinion non-necessities, plus demanding high quality of living is not an issue. It is the sadness that the pursue of  indulgences is based on an inadequate level of income. And the most devastating sight was the complaints that came after. I blame the society and the working environment which have corroding the virtue of modesty that would potentially lead Confucius to confusion.

Fuelled by the growing hunger for greater spending, an influence of my surrounding, and the witness of my financially trapped colleagues, I come to derive my own personal statement: To increase personal net worth by identifying and expanding indirect income sources and to reduce personal liabilities through careful financial planning.

There are still things which I want to do, but keeping this mission statement in mind should steer clear of any unsolicited temptations that would deviate from this central motto, and help consolidating all efforts in the things I do for greater personal achievement. And here are the list of things I want to do:
1. Travel: Home, India, and 2 more to improve life experience and photography skills;
2. Create and maintain photo-blog: improve photography skills and serve as additional income;
3. Improve financial knowledge, for greater career prospect and personal investment;
4. Saving target; and
5. Read.

An American friend now residing in Canada complained the rent and property prices in Vancouver. I questioned her rent-salary ratio, she quoted 1:4.5. Astounded by the low ratio despite the complaint, I, also currently paying 1:4.5 pre-tax (1:3 post-tax) on my rent, honestly think that her apartment deal as compared to my room deal, is brilliant.

The conversation reminded me of a Japanese colleague. I immediately frowned upon after learning that she was considering to spend near 1:2 for her rent. Despite her constant reassurance that “it’s okay”, I, based on her online shopping frequency, was convinced that a long term financial struggle is brewing.

Speaking from personal experience, I have in the past been famous among my Starbucks colleagues for my profligate spending on rent. At the record’s worst, my rent-salary ratio was 2:3, an unsustainable level which my colleague crassly commented as “no-life”. I, advocated the comfortable living idealism, resented the statement for far too long before I started realising that he was actually right.

How had it changed?

Half a year ago, due to the dire situation in securing a promising employment in London, I, abandoned my ideal living desire, finally caved in to the many procrastinated obligations – remit money back home, saving for travel and return ticket back to Malaysia – and reluctantly moved from a double room in a Victorian house to a 7m2 single room of an ex-council flat alike. As you would have imagined, the limited space found its way to allow misery to creep in.

However, the improved food affordability, the rising social activities and the rapidly increased saving reservoir that followed the effective reduction of rent-salary ratio from 2:3 to 1:3, offset the misery in no time. For a very long time, I was delighted to be living a more comfortable life with money to spend on things I desire.

The paradigm shift in my definition towards a room was so profound that I realised a healthy mentality towards rent is to never make it a priority, but to only consider after other obligations have been fulfilled. Otherwise, you are on course to self-imprisonment, only in a nicer room.

The question: How much rent should you pay before transforming yourself into a (renting) mortgage slave?

Holding to the aforementioned principle, the answer is to calculate the maximum rent affordable after fixing other spending allocations. For instances, allowance to satisfy the enormous appetite for shopping; incentive for dining out and trying out new restaurants enthusiasts; remit money back home; and savings for rainy days.

You must realise that all these “spending” are variable costs. They are not fixed and you have the complete power to adjust them according to your financial needs at any given time. For instance, if there is a planned holiday in Spain in two months, you know it is time to rack up the savings, perhaps from fewer dining outs and reduced shopping.

Rent, and transport if you are a travel pass purchaser, on the other hand, are fixed costs. Like it or not, these are the obligations you must fulfil every month. And this is the chief reason why they should be the last priorities, because you have no power of control on them once you have signed up the contract.

Using the same Spain holiday example, if you are already on a high rent-salary ratio, how do you see yourself saving for the pleasure of travel? Are you going to skip dinners or refraining from shopping, even for travel essentials?

It may sound identical to some people that regardless how much rent you pay, you will still need to save money by reduce spending on shopping and dining to fund the holiday. You are almost right. The key here is, however, the power of adjustment. If you were already on a high rent-salary ratio, spending allocation in other areas are relatively less than if you were on a low rent-salary ratio. This means that even if you reduce spending in the same proportion in both cases, the absolute monetary saving could be vastly different.

Let’s plug in some numbers to illustrate the situation clearer. Considering in both cases A and B, the monthly income is £2000 and 20% allocation in shopping and dining each, and the target is to save money for a planned holiday in Spain in two months.

Case A (rent-prioritised): Rent (good living condition) is the priority and after falling in love with a place, willing to fork out £900 rent/month. This translates to a combined £440/month allocation for shopping and dining.
Case B (allocation-prioritised): Rent (decent living condition) ranked the lowest and after careful budget planning, the maximum rent affordable = £600/month. This translates to a total of £800/month allocation for shopping and dining.

As both dining and shopping are adjustable (variable) costs, if I halved my dining and shopping for two months just to save for my upcoming holiday, Case A and B would return £440 and £800 respectively. If your holiday budget is £1000, it is now clear that an allocation-prioritised budget will bring you closer and faster to your target compared to rent-prioritised budget.

To summarise, the idea is if you are paying high rent, your spending power in other areas will be restrained. By the time when spending adjustment is needed, it will be less effective for rent-prioritised individuals. Therefore, it is crucial to define current and expected spending before finalising the maximum rent affordable. More importantly, is spending that extra on rent really make a significant difference?

My personal experience told me no, and that is my opinion on how one should measure how much rent to pay.

 

According to Chinese proverb, the success of wealth or financial management on a micro and macro level respectively lies behind two keys – resourcefulness and austerity (Mandarin: 开源节流). Briefly explained, the Chinese believe that financial discipline avoids profligacy and contributes to deficit reduction, whereas the diversification in income sources sustains massive spending appetite, and more importantly help steering a financial state from toxic to healthy, commonly known as growth.

To any Chinese language learner, Chinese proverbs are famous for the attentiveness in construction. In the aforementioned proverb, the Chinese prioritised resourcefulness over austerity because they believe the former is a more effective financial management tool.

Now, when we look at the West currently engulfed by the abundant misery supplied by the sovereign debt crisis, we also see that apart from the United States, governments in the troubled areas have resorted with a vain hope to financial discipline, or the clichéd austerity, to improve their credibility and then to stimulate the much needed financial support from market to fund their ever ballooning debts.

The Chinese proverb certainly disagrees with the austerity focus. However, I am not discrediting the intelligence of policy makers in the beleaguered countries. It’s no easy job at this economic tough time. Potential financial pipelines everywhere have been so firmly shut it is now near impossible to diversify income sources.

Bearing in mind also is that with individual finances so tightly squeezed, no political party struggling to receive devoted support would ever fire the most powerful financial ammunition of a government – raising tax. Nonetheless, the dire economic situation has forced governments to tactfully experiment this instrument with caution. One domestic example would be the VAT rise by the UK government.

And recently, there was a new addition to this tax raising episode – the Hungarian government is considering the introduction of  Hamburger Tax.

My personal scepticism and general public consensus reckon that the introduction of a fat tax like this is more than just the Hungarian government’s concerns over its citizen health issues. It essentially is a new form of budget revenue. It is a legally intolerable deprivation of personal freedom. And frankly enough, it is indirectly speaking to its citizens that they are not intelligently capable in distinguishing what is harmful to them.

However, buzzing apart, in this example, like it or not, the Hungarian government’s approach has demonstrated the spirit of our Chinese proverb perfectly – generating alternative (tax) income via the introduction of new tax and at the same time driving the population to a healthier living that would eventually reduce the monstrous national health care expenses. Brilliant!

Given the intricacies in implementing such tax – which food to tax, how much to tax, people’s reaction (through the ballot boxes) – I very much doubt its future success. However, if miracle does occur, I am almost certain the UK government would be the first follower.

The number of people severely overweight has tripled over the past thirty years in the UK. This has prompted a costly revamp on the ambulance fleet in the country to up to a whopping £90,000 per fleet so that obese patients could be ferried safely. No kidding! If you were the government policy maker, surely this would be an attractive incentive for the imposition of similar Hamburger Tax.

Forget about whether this is a long term solution to a long term obesity problem or a short term solution to a medium term insolvency hardship, I personally do support such tax to a certain extent. It’s challenging to punish individual’s misbehave as it’s very subjective, especially when it involves liberty right. But if this really does raise the awareness on the health risks associated with obesity, then perhaps this shouldn’t be interpreted as an extreme tax harvesting deception. And if we still remember our Chinese proverb, it could induce saving at micro level too.

Nevertheless, like my friend suggested, I still want to be able to pick up a pack of crisps when I want to, without having to feel guilty, or worry financially.