The Welfare Services Group of the Personnel Services and Staff Relation Branch has invited Mr Jones Lam, Financial Planning Consultant, to give a briefing on the rules of household financial planning (HFP). If you can strictly follow the HFP rules, manage your finance smartly and learn financial planning at an early stage, you can easily maintain your family and land on the road to wealth.

A frequently asked question is how to start financial management, whether with savings, stocks or other investments? In fact, the basic rule for financial management is to have sound household management because only systematic household planning with definite targets can give you the drive to set aside funds for investment. Before making good household planning, you must ask yourself: "What is my dream?" With a dream to pursue, we will then realise the reasons for household planning and strict compliance with the following HFP rules.

There are 15 strict rules for household financial planning. Details are as follows:

(1) Consider the priorities for the use of funds. Living a "thrifty" life blindly is not a good strategy. Money should be spent on alleviating various types of pressure, such as those arising from finance, work and livelihood. In determining whether money should be spent on certain things, you should consider the type of pressure to be relieved. If none of the three types of pressure can be relieved, then the money should well be saved. For example, the lottery ticket jointly bought by Chi-keung and his colleague Lily won them prize money, each sharing $30,000. Given such good luck, Chi-keung decided to make a good plan for the use of the money. First, he planned to spend part of the money on travelling with his girlfriend (to relieve work pressure) and part on repaying his revolving loan (to relieve financial pressure). The remaining sum would then be given to his mother as lucky money (to relieve pressure of livelihood).

On the contrary, Lily went to a department store to buy a brand name handbag at over $10,000, expensive skincare products, and gorgeous dresses. With all the money spent, her credit card debt remained unsettled; no money was given to her mother and she was still feeling blue. This example shows it is more worthwhile to spend money on something that helps relieve pressure.

(2) Apply the principle of "income-savings is equivalent to living expenses". In general, the logic people usually apply in allocating their income is: "It's acceptable to pay an instalment payment of $10,000 for my car out of my income of $30,000." However, if you wish to be good in financial management, such mindset must be changed. The correct way is to set major targets for the future first and then save some money every month. Deduct the savings from the income and use the balance as living expenses.

(3) Budget management means keeping the budget of living expenses a bit stringent but not too tight. Rich people also apply this approach.

(4) Although you are satisfied with your income and job, you should still maintain the momentum in keeping in touch with the community. Nowadays, with the continuing advancement in technology, the community has become more and more demanding in respect of employees' job performances. Some jobs are no longer "iron rice bowls", and you should maintain your competitiveness in order not to be laid off.

(5) Wealth, in genuine terms, refers to your attitude towards money and your ability of financial management, rather than the amount of money you possess.

(6) Assume that people generally begin making earnings at the age of 30, retire at 60 and live up to 80. This means provisions have to be made for the 20-year retirement. Therefore, you must make your planning early so that the quality of your retirement life can be assured.

(7) Make proactive investment in yourself. Spare no money in pursuing further studies and a second skill. Though your income is not going to increase significantly in the short run, you will ultimately get a higher return if you can keep upgrading yourself.

(8) If you decide to arrange your finance, the first step to take is to get used to classifying your accounts for different purposes. The next step is to maintain a monthly record of household finance, which will provide a clear picture of management of funds. For a family, five separate accounts are not too many:

A. Account for deposit of income: This account is exclusively for recording the normal income of the family. All incomes that a couple intends to include into household financial management may first be deposited into this account.

B. Account for payment of living expenses: Make a plan for monthly living expenses according to Rule (2) above and then withdraw the required sum from Account A. This approach can avoid over-spending.

C. Account for savings and investment: First, make a plan to achieve the future targets of the family. Deduct the required amount from the monthly income for appropriate savings and investments with a view to achieving the family targets. This approach allows you to know at any time the amount of surplus money available for investment and can avoid excessive investment.

D. Account for household fund: It is common for households to incur significant non-recurrent expenditure on various occasions, such as renovation, procurement of additional or replacement furniture and electrical appliances, etc. Before planning allocation of living expenses, you may reserve a fixed amount as a provision for household funding. After such expenditure has been incurred, the required amount can be withdrawn from this account.

E. Account for contingency fund: Whether being single or married, you must set aside an amount that can maintain your living for three to six months as contingency fund. The balance may then be used for investment and other purposes.

(9) Set aside an amount as contingency fund. It is generally suggested that a contingency fund, sufficient to maintain your household expenditure for three to six months, be reserved for unexpected use. You may save the contingency fund with the Credit Union as its liquidity is high and additional return can be earned.

(10) Everyone has some spare time. The question is whether you are at leisure or busy in socialising.

(11) The timing of buying a new flat or selling your existing flat for buying a new one, is very crucial. In this regard, the expenditure and budget for purchasing a flat must be calculated carefully. For example, what is the price of a flat that I can afford?

(12) Bringing up children is a major commitment in family planning. Hence, you must make a good plan as soon as possible about the education level to which you can support your children. It is essential to list out clearly all the estimated expenditure in a budget.

(13) If you wish to be happy and free of worries at old age, you should note that health is as important as wealth. In this connection, you should start at this moment making a good plan for your present wealth and health.

(14) If you want to buy a car, don't make a decision simply because of an attractive advertisement. Beforehand, you should take into account all the expenses, such as petrol cost, parking fee, insurance, licence fee, and costs of repair and maintenance, etc., and consider carefully whether there is a genuine need to buy a car.

(15) If it is difficult to have savings, you may try to, for example, join some savings plan where a fixed sum is deposited at regular intervals, or reserve part of your wage for investment.

(PS & SR Branch Welfare Services Group)