Many years ago I read a book titled The Richest Man in Babylon by George S. Clason, published way back in 1926. This book put me onto the path of automatically saving 10% of whatever I am earning at the time.
It doesn’t matter if you earn $10 per week or $10,000 per week – the percentage is always the same. Also known as “ Paying Yourself First ”.
When your wages are paid into your bank, this is what I like to call a ‘ My Working Account. ’ This is your account that you will use to pay day-to-day expenses – like food, electricity, petrol, phone, toiletries, etc.
Arrange with your bank, financial institution or employer to automatically deduct 10% of your weekly or monthly earnings and deposit that amount into a separate account from your Working Account [ a high interest account if possible ]. This is what I call ‘ My Reward Account ’. Make sure this account is not easily accessible. My own is not accessible same day nor via internet banking.
Some banks call these ‘ Christmas Club Accounts ’ whereby you can only withdraw at the end of the year or in an emergency situation – but you have to withdraw the whole amount. This makes you think twice – is this really an emergency or a ‘ want ’ ?
After a while, you will find that you will not miss this 10% and it soon adds up. This can be a nice surprise, come holiday time or when you want to buy yourself something extra special – e.g., a deposit to purchase a home.
I first heard about starting an Emergency Fund account back around 2008 by Suze Orman when she appeared on the Oprah Show. She predicted the GFC and was advising viewers to start an emergency fund immediately to cover unforeseen situations – like unemployment. Initially she said to save enough to cover 3 months’ worth of living expenses to include mortgage, credit card, utility bills, medical emergencies, tax, food, etc.
You can choose any amount you like towards your Emergency Fund but make sure you do it consistently, preferably automatically. Mine isn’t with my regular banking institution and it is truly used for Emergencies ONLY.
Suze has since reviewed her Emergency Fund and suggests you have 12 months’ worth of expenses put away as, post-GFC, jobs are harder to come by and longer periods of unemployment are more common.
To calculate how much money you will need for 12 months, you will need to create a spreadsheet of all your expenses.
Firstly I created a personalised spreadsheet showing exactly how much I spent every day for a year to see exactly where my money was going [ see example below ].
|Fast Food||Clothing||Pharmacy / Medical||
I then transferred these figures into a Summary Spreadsheet to see where I could do some trimming [ see link below for a Printable Sample – Summary Sheet. You will need to personalise this according to your own outgoings ]
Now ensure that your expenses are less than your income!
Wealth Creation Fund
It makes sense to have any surplus income automatically deducted from your pay packet each week or month [ aka Salary Sacrifice ]. In some cases, it is more tax effective, too.
Let these funds work for you by placing them into a Retirement or Wealth Creation Fund; these could be Managed Funds where a company buys stocks and shares on your behalf and you are paid dividends. Alternatively, you can manage both yourself if you have the time – personally I prefer to pay a Professional.
I have been doing both for decades [ whether I am currently employed or not ] and it has really paid off. Watch your Wealth and/or Retirement Fund grow over the years and live more comfortably later on.
Automate your Savings now !
A little bit effort in the beginning will pay you big dividends long-term.
Until next week,