Expats living in Shanghai and being paid a high salary have a unique opportunity to do some heavy lifting when if comes to their financial planning. Many new Shanghai expat households start out by pumping up the lifestyle a little (housekeeper, driver, etc), while others are able to accumulate a fair bit of cash. Enjoy it while you can, because it won’t last forever – or will it?
One of the most important products of a well-constructed financial plan is a predictable system for converting income (cash flow) into long-term assets. It doesn’t take sophisticated financial calculations to pull this off – just a little data, a systematic plan, and a lot of time.
1) Determine your real INCOME (cash only):
Salary – taxes
2) Decide on your FREE cash flow:
Income – Expenses = Potential Investment Funds
How much can you invest every month?
If it is variable, try to arrive at a stable figure that you reliably predict on every month.
3) Allocate the money to a Short, Medium or Long term obligation or goal.
How much can you put away each month. (This is a great time to review your household budget. If you are spending more on Tong Ren Lu entertainment than on your children’s education fund – clearly you have some important choices to make.)
The SML analysis should have yielded you a comprehensive QUANTIFIED list of your financial situation.
Review and rationalize your plan if necessary.
This is usually the point in the planning process where people realize that some of their goals and objectives are unreasonable or impossible. Don’t panic – but do make adjustments to your plan. If you have no assets and a 2,000 rmb / month excess cash flow, you are probably not going to be able to retire comfortably in 5 years. Something has to give, and unless you have a secret plan for acquiring a windfall you are better off adjusting either your planning horizon (work longer) or reducing your expenses ( fewer Blue Angel evenings).
Hints for making the Income – Savings conversion work.
1) System = Discipline. The more structured your savings & investment plan, the more likely it is to succeed.
2) Level amounts = dollar cost averaging. One of the most powerful aspects of a systematic plan is a commitment to invest the same amount each month. When markets are dropping, your get more “bang” for your investment buck.
3) Time is on your side. Long term investing is one of those times when the calendar is working for you. Long term investors tend to be the most successful. Your day-trader friends talk a lot when they’ve had a good run, but it’s the long-term savers who have the last laugh.
4) Don’t mess with the fund unless you have a good reason. Do you like taking a few risky positions or chasing an insider tip every now an again? Go for it – but don’t use your core savings fund. Gambling, speculating and lottery tickets are all forms of entertainment – not serious financial planning.
5) Pay yourself first. Don’t make the mistake of saving what is left at the end of the month. You will be much better off if you start the month knowing how much you will invest, and then planning your other expenses around what’s left. (This is the hardest part about long term investing, and you have to have degree of flexibility. If your child needs an operation then naturally you have no choice. But if your retirement planning revolves around a big jar of 1 kwai coins that you add to when you can – you are probably not maximizing your savings potential.)
The product of any household financial plan is to convert cash flow into long term assets during you working years. Later you are going to want to do the same process in reverse and start converting assts – i.e.: your retirement savings — into retirement income.