My No. 1 Method to be Financially Wealthy.
In my previous two posts here and here, we discussed why we are bad with money and how schools doesn’t help much.
So what’s the solution?
I usually don’t believe in one size fit all solutions because every problem is different. But when come to personal finance and investing, there is an exception, a one-size-fit-all method.
I have been using it for almost 13 years and it has served me well. And I want to share with all my readers right here.
Note that this is not investment advise. This is me talking to myself. Take it for what it is worth.
In our life, the important events tend to have a common trait. We will dedicate a DATE for it.
We love our mothers, so Mother’s Day.
We love our country, so National Day or Independence Day.
We love our pets, so World Pets Day…. and many more.
But it seems like we don’t have a functioning, let alone successful, date that is dedicated to Personal Finance & Investing.
From my research, I only found one date on 14 August, that is National Financial Awareness Day. However, even I am not aware of it before writing this post, and I consider myself as “financially aware”. This shows how unsuccessful the event is.
There are probably several reasons for it.
First, the name is boring. Second, no one is actively promoting it.
Therefore, I set a date for myself, and I called it the “Make-Yourself-Rich Day”. I really like it because the name is very catchy and it motivates me (who doesn’t want to be rich), and by dedicating a day, I know that I have protected time to sort out my finances.
What to do on “Make-Yourself-Rich Day”?
On Make-Yourself-Rich Day, I set time aside to think and plan for my financial well-being. While it is simple and easy to follow, it has brought me tremendous wealth and I don’t have to think about my personal finance for the rest of the year.
I use three key words to guide my thinking:
- Protect – Insurance and financial security
- Grow – Investment
- Sustain – Making sure my wealth continues
Protect – Insurance Policies
If you are doing this for the first time, you might want to sit down with your insurance advisor. In general, you should determine if you are adequately covered. Do you need life or term insurance?
Mostly importantly, SET ASIDE THE PREMIUM and don’t touch them. In this case, no matter what happen, you know that your insurance policies will not be affected. On subsequent years, you review it very quickly to see if you are satisfied with the insurance coverage.
Quick tip: Have enough money from the insurance to survive at least 8 years should you contract a critical illness.
Protect – Emergency Cash
This is very easy. Always set aside at least 6 months of living expenses. They can be stored in a bank account or any zero risk asset that can be cash out easily. This is to guard against any unexpected drop in income. E.g. retrenchment, business downturn etc.
Quick tip: Review your living expenses annually. If it changes due to different life stages (such as marriage, kids or old age), you must adjust the amount of emergency cash accordingly.
Grow – Investment
While I manage my investment actively throughout the year, on Make-Yourself-Rich Day I will decide how much should I add to my investment.
I will decide on a monthly sum (for example, $1000 per month) and set up an automatic transfer process. Under this automatic transfer, my bank account will deposit $1000 each month into my investment account. Rain or shine. This will ensure that every year my investment account is growing and not stay stagnant. This will also guarantee that I am on-track to my investment/retirement goals.
Quick tip: Always set up an automatic process so that you remove the need to remember it. Treat it as a forced savings. However, the amount must be realistic. If the amount is too small, it won't make a difference. If the amount is too big, it will affect your daily life. Try to aim for at least 20% of your salary.
Sustain – Big Ticket Item
As we proceed to different life stage, we will have some big ticket items that we will need to pay for. For example, having a kid in 1 year’s time, buying a house in 2 year’s time, my annual holiday vacation plans, getting a car……
To sustain our lifestyle, we must plan for these big ticket items in life, because they are crucial to our quality of life.
Most people are good with short term needs but fail to plan for long term needs. Therefore, planning for these in advance are critically important.
I will plan for any big ticket items that is likely to happen in the next 3 years and make sure that I put aside sufficient funds for it.
For example, if I am renovating my house in 2 year’s time, I have 24 months to save up. If the renovation cost is $30,000, the monthly saving amount will be $30,000/24 = $1,250.
First, this is to ensure that your investment goals are not affected by these big ticket items. You do not want to stop investing just to buy a car. You will be sacrificing your retirement!
Second, by planning for these big ticket items, you will also get a sense of the probability of achieving it. If you have a hard time saving $1250 each month, perhaps you should delay the renovation and give yourself more time.
Third, this also give you a pause to consider if the big ticket item is worth it. Whether the item is worth your effort to save and scrimp for 2 long years. Most of the time, I will drop the idea of buying expensive stuff after thinking about it. (Goodbye Rolex, but Welcome Smart Watches!)
Quick tip: If the item has a very high price tag, you can also consider lengthening the saving period to 5 - 10 years. The more time you give yourself to save for it, the easier it is.
When is “Make-Yourself-Rich Day”?
Of course there isn’t an official day for it. I set it as 1 Jan of each year since it provides a new beginning and it is easier to remember when it rides on an existing festive event.
So if you have not set your own “Make-Yourself-Rich Day”, why not join me on every 1 Jan and make yourself rich!
See you soon!
Investing Always,
Pete
