Source: Founder of Piggy Gaga Financial Education, Sang Chan.

Raising children is often described as “bit pricey,” meaning that expenses increase significantly. As parents, how can we manage our finances effectively? Many parents believe that their income level determines their quality of life. While income is certainly related to quality of life, there is something even more important. If every family handles it well, their quality of life can still be greatly improved, and that is how they manage their income.

Each parent can use a simple financial concept, known as the financial pyramid, to allocate their monthly income. The underlying principle of this financial pyramid explains how to divide and allocate every dollar earned to the appropriate areas, maximizing the value of each dollar. By following the construction and operation of this financial pyramid, the financial situation of every family can become increasingly healthy.

At the base of the pyramid, the first step is to allocate around 5% of the income to Mandatory Provident Fund (MPF). After setting aside funds for MPF, the next level is to allocate for our basic needs. Basic needs refer to our necessities such as clothing, food, housing, and transportation. As parents, this also includes the daily supplies for our children, such as formula milk and diapers. It may even include their educational expenses as they grow older.

Approximately 50% of the total income should be allocated to cover basic needs, which is a reasonable level. After managing basic needs, we then have to consider taxes. The amount of taxes varies for each individual. In Hong Kong, approximately 5% of the income is usually manageable for taxes.

After allocating for these three levels, how can we manage the remaining money to gradually improve our quality of life? The first part is allocating around 10% of our income to liquid cash. Another 10% can be allocated to asset protection, where the most important asset is ensuring our own and our family’s well-being

After arranging these two 10% allocations, we have approximately 20% of the income remaining. This 20% can be allocated to asset appreciation, allowing us to achieve some important life goals. Sometimes, parents may ask, “Do we need to be very wealthy as a family to engage in financial management? Can we manage our finances even if our income is just enough?”

High-income families are like large houses, and they may have more things to take care of. They might have a storage room where all the miscellaneous items can be stored and the door closed. The whole house will then become tidy, and the overall management will be much simpler.

But if our house is not that big, metaphorically representing our income, we can imagine a small house. If we take good care of it, it can still lead to a better quality of life. If our income is more abundant, of course, there will be more room for financial management. However, if our income is just enough, it becomes even more important to manage it well.