How to Save a Little Fortune

How to How to Save a Little Fortune

How to Save a Little Little Fortune For tune

Illustrated and written by Yow Chuan

© 2010 www.meshio.com


How often have you heard of the phrase “Pay Yourself First”? It has been written in so many personal finance books and preached by so many financial planners out there that the act of “paying yourself first” is no longer a secret. If it’s no longer a secret, why is it still so hard to save a single sen after getting your monthly paycheck? That, my friend, I cannot answer for you, as everyone’s situation is very unique. Here are a few possible reasons why you are not able to pay yourself first: (i) You are spending more than you earn. (ii) You did not automate the process of paying yourself first. David Bach has written a convincing book- The Automatic Millionaire, on why you must automate the process of accumulating wealth. (iii) Leeching friends who likes to borrow money from you. Trust me; it’s a bad idea to borrow money to your friends. Refer them to a friend who works in a bank’s personal loan department. department. You will thank me for this advice.

The Percentage Allocation System I am going to explain in detail why it’s effective and why you should give this system a shot. Let’s start with your intention of keeping track of your incoming ringgit and outgoing ringgit. What’s the whole idea of keeping track of it? it ? Yeah, close your eyes for a few seconds and ask yourself deep down inside.



If your answer is to ensure that you do not overspend and hoping that you will be able to save a portion of that money to work for you (either as an emergency fund or for the sheer purpose of seeing it accumulate), then this might just be the system meant for you. Okie, so what do you normally do when your January paycheck arrives into your savings account? If you are going to just leave it there and hope that at the end of the month, you will have some savings to bring forward to the next month, then I can assure you that it’s very likely not going to happen. So what are you going to do to prevent the account from drying up? Here are a few possibilities you can choose from (The following procedures procedures must be executed, if possible, automatically, once the paycheck is in the account) a) if if you will be needing the money in case of a sudden e mergency

Channel X% of the money using auto-debit/standing instruction to a bank that you do not have an ATM card, with the least branches around and the one that will give you the most trouble accessing to, for e.g. Bank of China (so far, I’ve only know of one branch in Jln Ampang). Preferably a fixed deposit account. b) you already have about 3 months w orth of monthly salary to buffer buffer for any emergen cies in a saving account and might be needin g the cashflow in the next 5-6 months

Setup a conservative mutual fund account where the objective of the fund is capital-guaranteed capital-guaranteed or with emphasis on capital preservation, I suggest that either a fixed income fund or a dividend fund. Transfer X% of your total



paycheck to this mutual fund account. Make sure you also apply for the autodebit facility, where the money will be deducted on a monthly basis. c) if your eme rgency fund is about 6 mon ths worth of monthly salary and you do not foresee any cash flow problem in the next 1-2 years

Setup a moderately aggressive to aggressive mutual fund account. Transfer X% of your total paycheck to this mutual fund account. Also, setup an auto-debit facility to automate the transaction from your “paycheck account” to this mutual fund account. d) you prefer a no-risk saving scheme, where your contribution is very limited and and you are pretty sure y ou will not withdraw it

Setup a 21-30 years endowment or annuity account where you can contribute to it on a monthly basis. Decide on X% of your monthly salary. Make sure you also use an auto-debit facility. Well, there could be other scenarios worth exploring. You can even open a CDS account and buy some blue chips stocks, but let’s try to keep things simple for now. The basic idea is to put your money where it will give you the best interest rate base on your cash flow liquidity. I shall explain in detail what X% in the next section.



The X F actor actor If you’ve noticed something from the procedures I stated previously, I did not mention anything on the amount of money you should put in the account. Herein lays the most crucial figure in the entire system, and one which only you can decide and determine yourself. The X% stands for an amount ranging from 1% or more, where 1% would mean that you are saving only 1% for your salary. Of course, the more the better, but for this system to work, you must specify this X amount and must be able to hang on to it like your life depended on it. To know what is the value of X, you must first calculate how much you are now spending on an average month (I won’t go through this with you, you should know better). If you are not even bothered to calculate your own monthly expenses, then you might as well stop reading here. Just like a company that doesn’t keep track of its own business account, there’s no way you can know how healthy the company is. Okie, let’s say you’ve figure out the average monthly fixed expenses. Subtract that amount from your monthly salary. For instance, Your monthly salary figure is RM 3000.00 Your average fixed expenses figure is RM 2763.35 Total remaining: RM 236.65. This figure should be positive, if not, you’ll have to work on that first :-)



That’s 7.88% of extra ringgit. To be safe, we will lower it down to 5%, since your expenses figure might vary from month to month, but it shouldn’t vary by too much. Now, the X for you will be, from the example above- 5%. You will now ensure that 5% of your monthly paycheck goes into one of the “Treasure Chest” of your choice before you even withdraw a single sen from your paycheck. This is a very important procedure that must not be violated at ALL cost. Consider this the rule of the game; if you break it, you lost. Hence, it’s best you automate this job, since as human beings; we are very easily influenced by mega sales. The more mega sales around, the more emotional we get. Once you started off the 5% allocation, consider this as the lowest denominator of your allocation. Hence, the only way is up. So, you should really consider very carefully if you can afford to part with the 5%. Even 1% is okie, as long as it’s positive and you can stick to it. Here comes the next part of the system. You have to increase the percentage of your allocation as new situation arises- for example, whenever whenever there’s an increment of your paycheck or you are getting an alternative stream of stable income which you don’t need anyway. Your expenses might increase alongside too, but as long as you have more money remaining at the end of every month, you must revise the percentage up a few notch.



The higher percentage percentage you can allocate, the faster you will see the magic of this system. I shall show post up a simulated example of how the magic is derived in the next section.

Automated Savings Chart As a continuation from where I left off, here’s the chart on how it would have looked like if you’d followed the steps mentioned earlier- by allocating an X% of your income into an untouchable fund. Income The

Annual

Increment

To be

Rate of

Total

Age

Magical X

Income

Ratio

Invested

Return

Return

25

3.0%

$ 24,000.00

$

720.00

10%

$

792.00

26

3.5%

$ 24,480.00

$

856.80

10%

$

1,813.68

27

4.0%

$ 24,969.60

$

998.78

10%

$

3,093.71

28

4.5%

$ 25,468.99

$

1,146.10

10%

$

4,663.80

29

5.0%

$ 25,978.37

$

1,298.92

10%

$

6,558.99

30

5.5%

$ 26,497.94

$

1,457.39

10%

$

8,818.01

31

6.0%

$ 27,822.84

$

1,669.37

10%

$ 11,536.12

32

6.5%

$ 29,213.98

$

1,898.91

10%

$ 14,778.53

33

7.0%

$ 30,674.68

$

2,147.23

10%

$ 18,618.33

34

7.5%

$ 32,208.41

$

2,415.63

10%

$ 23,137.36

35

8.0%

$ 33,818.83

$

2,705.51

10%

$ 28,427.15

36

8.5%

$ 35,509.77

$

3,018.33

10%

$ 34,590.03

37

9.0%

$ 37,285.26

$

3,355.67

10%

$ 41,740.28

38

9.5%

$ 39,149.52

$

3,719.20

10%

$ 50,005.43

39

10.0%

$ 41,107.00

$

4,110.70

10%

$ 59,527.74

40

10.0%

$ 43,162.35

$

4,316.24

10%

$ 70,228.38

41

10.0%

$ 45,320.47

$

4,532.05

10%

$ 82,236.47

42

10.0%

$ 47,586.49

$

4,758.65

10%

$ 95,694.63

43

10.0%

$ 47,586.49

$

4,758.65

10%

$110,498.60

44

10.0%

$ 49,965.82

$

4,996.58

10%

$127,044.70

45

11.0%

$ 52,464.11

$

5,771.05

10%

$146,097.33

46

11.0%

$ 57,710.52

$

6,348.16

10%

$167,690.04

47

12.0%

$ 63,481.57

$

7,617.79

10%

$192,838.61

48

12.0%

$ 69,829.73

$

8,379.57

10%

$221,339.99

49

12.0%

$ 76,812.70

$

9,217.52

10%

$253,613.27

50

12.0%

$ 84,493.97

$ 10,139.28

10%

$290,127.80

51

15.0%

$ 84,493.97

$ 12,674.10

10%

$333,082.08

102%

105%

105%

105%

110%

100%



52

15.0%

$ 84,493.97

$ 12,674.10

10%

$380,331.80

53

15.0%

$ 84,493.97

$ 12,674.10

10%

$432,306.48

54

15.0%

$ 84,493.97

$ 12,674.10

10%

$489,478.63

55

15.0%

$ 84,493.97

$ 12,674.10

10%

$552,368.00

Here’s the story behind the chart… This individual, let’s call him Mr Boh Ban Huat, started off working at the age of 25 years old. He earns an annual income of RM 24,000 and he managed to allocate 3% (RM 720) of that into a fund which gives him 10% return for that year. In the first year itself, he managed to make an extra RM 72.00 from his small investment. (This paragraph is contructed entirely from the first line of the chart). Ban Huat is a very hardworking chap. His hard work was rewarded in the first year with a 2% increment and this happened every year until he’s aged 30 (see figure 1.0). During these years, he has also increased his percentage from the initial 3% allocation to 5.5%. Since he didn’t touch the money in the fund, the accumulated interest interest at 10% has earned him RM 8,818.01 in the fund by the time he’s 30 years old.

Figure 1.0

Ban Huat continued this habit for many years to come, and when he’s near retiring at the age of 55, he manages to contribute even more to his fund (up to 15%) while his annual income stops increasing.



At his retirement party, Ban Huat has managed to saved up to RM 552,368 effortlessly and in fact, he was pretty much surprised at how much this automated process has bloated his initial savings. See Figure 1.1

Figure 1.1

He then decided to share this spreadsheet with anyone who might be interested to fiddle with the figures and see the impact of this automated saving system. You can email him to get a copy. ***** Okie, that last paragraph was totally made up. However, if you are really interested to try out and see for yourself how this system can apply to you, just sent me an email and I shall attach this spreadsheet for your own reference. In the next section, I shall conclude the benefits of using this system, as compared to the usual tedious way of documenting every sen you spent daily.



The Better Way to Save So, after looking at the Salary Percentage Allocation System, hopefully you can agree with the following benefits that this system offers:1) Doesn’t require much of a discipline, since you don’t have to worry about forgetting to jot down your daily expenses 2) Once setup, you are ready to automate the process entirely to the machine 3) A definite way to really ensure you pay yourself first before you pay others (how else can you expect to save any money?) However, this is not a system which will guarantee your success in accumulating money. In fact, a good system is a flexible one, in which YOU yourself will be the most important factor in determining how well this system works. How is that so? By monitoring and constantly reviewing if the figures and percentage works for you from time to time. You should fine tune it regularly to ensure that the system is not too taxing on your lifestyle and not too lenient that you are only contributing 1% of your income for the next 10 years. Time to throw complicated budgeting spreadsheets spreadsheets out of the window?



About the Author Yow Chuan is an associate member with the Financial Planning Association of Malaysia (FPAM). He is also the author of the Guide to Smart Insurance Planning which is

available in bookstores nationwide. You can also order a copy directly here: http://www.meshio.com/200 http://www.me shio.com/2008/09/the8/09/the-smart-guide-tosmart-guide-to-insurance-plan insurance-planning-forning-formalaysians/ You can also follow him at his blog at www.meshio.com


How to Save a Little Fortune

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