The bigger your earning, the more important it is to identify your ‘free cash flow’ or excess income that you can set aside for investment. This is much harder to do in Shanghai and other major Asian capital cities because costs and charges are so different, expats’ spending habits change and many big items are covered by employers.
Financial planners calculate your ‘excess’ income which is free to be invested as:
Net salary – expenses – discretionary spending (travel, restaurants, clothing, etc)
If a plan doesn’t take into account the last part of the equation – the discretionary income that defines your lifestyle – then it is not going to be effective or long-lasting. A good planner will focus on doing everything possible to maintain your standard of living and range of activities. Be on the lookout for aggressive financial planners or advisors who intentionally pad your excess income in the hopes of boosting their commissions from the bigger investment.
The true danger here is that many people have a distorted view of their own spending. They tend to under-count their expenses –and ignore their discretionary spending all together. Early iterations of your financial plan may indicate that your excess cash-flow at the end of the month is 70% of your salary. While this may turn out to be accurate, it is more likely that you are grossly underestimating your true expenses. If you are spending over $500 every month on restaurants then you can’t calculate your food budget based on the maids supermarket budget. You have to be realistic about your habits, customs and lifestyle. If travel, restaurants, shopping, bars or anything else is a significant part of your life, then you have to count it.
One advantage to doing this kind of rigorous analysis of your own finances is that you will have better information about the amount money you can comfortably invest. A second benefit is that if you find that you are falling short of your goals and need to save more, then this is precisely the information you need to adjust your free-spending ways.