5 Highly Effective Ways To Grow And Bulletproof Your Wealth (Part 1)
When it comes to managing their wealth, a number of people usually go by the 3 step process of earning money, spending money and finally saving whatever money is left over. You probably might have known friends or family members who religiously adopt this ‘financial mantra’ and chances are, you might be using this approach yourself.
By using this approach, in some months, there would be a lot left over to save and in other months, maybe less or none at all. At the end of the year, whatever money that is saved during the course of the year will definitely go towards the annual year-end vacation. Sounds familiar?
However, by using this strategy, most people often come to realise that it is hard to save up for long-term goals, such as buying a car, having a dream wedding, owning a property or simply to retire with a peace of mind.
Not to mention, some people may not be adequately equipped to handle the various ‘what ifs’ of life – what if I needed to be hospitalized or what if I can’t work anyone because I have contracted a critical illness?
And as the high costs of living in Singapore has seemingly become the norm (we are ranked the most expensive city to live in for the third year running), are there better and more effective ways to grow our wealth? Are there strategies to bullet-proof our wealth, should life throw a curve ball at us?
We offer our humble opinion below on how we can more effectively grow and bulletproof our hard-earn wealth.
1. Have An End Goal in Mind
If you boarded a taxi and you did not tell the driver where you wanted to go, what do you think would happen? The thought of it sounds ridiculous doesn’t it? Either the driver would start driving with his own destination in mind or the driver would not start the journey and you would remain where you were. Either way, it would not take you to where you want to go.
Similarly, you need to have a vision of where you want to be financially, or to put it simply, your financial goals. You got to have the end destination in mind before you can proceed to plan your finances.
So how do we go about setting financial goals for ourselves?
You can start for off by setting goals in trenches: What do I want to achieve in the next 1 year? 3 years? 5 years? Once you have set your goals, you can then reverse engineer to find out how much you need to put aside on a monthly basis to achieve your goal. Below is a simple formula to calculate how much you should save per month to achieve your goals:
[(Financial goal – Current cash assets) / (No. of years to achieve goal)] / 12
Take for example, you are planning to own your first car in 3 years’ time. Let’s assume the brand new car you have set your eyes on costs you $100,000. In Singapore, you would have to pay a minimum down payment of 40% for the car, which means you must have $40,000 in cash when you want to purchase your car. Let’s also assume you have cash assets of $10,000. Putting all these information into the formula, we will get the following:
[($40,000 – $10,000) / 3] / 12 = $833.33/month
Hence, what this means is that if you are want to own your first car 3 years down the road, you need to save $833.33 per month in order to have enough cash for the down payment of your car.
2. Pay Yourself First
Every month on your payday, immediately set aside a fixed percentage of your salary before spending or using it to pay your bills. Why do we do that? Think of it as paying your future self a salary, this amount that you put aside is to make sure that your future self will have enough money to pay for that down payment of your house or have enough cash buffer for emergency or ultimately for your retirement.
What amount is enough for this purpose? A simple guideline would be anywhere from 5-10% of your net monthly salary.
So if you are earning a gross salary of $2,500 per month, in Singapore, you need to contribute 20% of your pay to CPF, making your net salary $2,000. Let’s say you decided that you want to pay your future self 10%, this means that you will be putting aside $200 per month towards this purpose.
Then again, 5-10% is just a guideline. You decide how much your future self is worth. If you think that your future self is more important than your current self, you can even allocate more than 10%. Keep in mind though to ensure that you have enough left to pay the bills and have an adequately comfortable standard of living.
So how should we pay ourselves first? Preferably, this amount of money is parked in a place where it will be difficult for you to access or maybe even have a certain penalty if you dig into it before a certain period of time.
One common strategy is to park this money into a separate bank account. To make these funds less accessible, you can keep the ATM card for this separate bank account at home so that you are less likely to withdraw money from this bank account to pay for your expenses.
If for whatever reason, you start to feel that it is getting difficult to pay your bills or you don’t have enough to spend, do not immediately cut back on this amount that you put aside. Instead, look into your spending habits and see where you can cut back on your spending (refer to ‘Understanding your spending thoroughly’ below).
Remember, this amount is set aside is akin to paying your future self a salary. Imagine how would you feel if your boss stopped paying you your monthly salary? That’s exactly how your future self would feel – short-changed.
3. Understanding Your Spending Thoroughly
It might be surprising for you to find out that there could be a significant difference between what we think we spend and what we actually spend on.
Though there are monthly fixed expenses such as our monthly bills and contribution to the family, our actual spending might consist of hidden expenses that eat up a significant portion of our overall spending. For example you might be spending $150 per month on your favourite bubble tea or artisanal coffee or paying over $400 in taxi fares without you knowing it.
Hence for most of us, even though it felt like we haven’t spent a lot of money for the month, we often wonder where our hard-earned money has gone to. Until you start tracking your spending down to every single cent, you will never know exactly where your hard earned money has gone to.
To start off, you may want to use a spreadsheet (such as google sheets) to keep track of all your fixed expenses and your “impulse expenses”. Alternatively, if you are smart-phone savvy, you can consider downloading apps to help track your spending.
Ideally, it’s best to track your expenses on a regular basis. However, if you are don’t want to go though the hassle of keying in your expenses regularly, you can still have an approximate picture of your spending habits for the year by doing the following:
At the start of the year, you can consider tracking your expenditure fervently for 3 consecutive months. From there you can project your expenses for the rest of the year to get an approximate view of your current spending habits.
After having a good idea on where you hard-earned money goes to, you can then proceed to trim down on unnecessary expenses. It might amaze you that by doing so, you can potentially cut down your expenses by 10 to 20%. If your monthly expenditure is about $2000 for example, you can potentially generate up to $400 of extra savings.
If you are interested to learn more about wealth management and investing, do join us for a free 3 hour financial and investment workshop today.