how to save a little fortune

8/9/2019 How to Save a Little Fortune

1/11

HowtoSaveaLittleFortune

How to Save a Little Fortune

Illustrated and written by

Yow Chuan

2010 www.meshio.com


2/11


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 its 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 everyones 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; its a bad

idea to borrow money to your friends. Refer them to a friend who works in a

banks personal loan department. You will thank me for this advice.

The Percentage Allocation System

I am going to explain in detail why its effective and why you should give this

system a shot.

Lets start with your intention of keeping track of your incoming ringgit and

outgoing ringgit. Whats the whole idea of keeping track of it? Yeah, close your

eyes for a few seconds and ask yourself deep down inside.

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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 its verylikely 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

must be executed, if possible, automatically, once the paycheck is in the

account)

a) if you will be needing the money in case of a sudden emergency

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, Ive

only know of one branch in Jln Ampang). Preferably a fixed deposit account.

b) you already have about 3 months worth of monthly salary to buffer for

any emergencies in a saving account and might be needing the cashflow inthe next 5-6 months

Setup a conservative mutual fund account where the objective of the fund is

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

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paycheck to this mutual fund account. Make sure you also apply for the auto-

debit facility, where the money will be deducted on a monthly basis.

c) if your emergency fund is about 6 months 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 you are pretty sure you 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 lets 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.

2010 www.meshio.com


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The X Factor

If youve 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 wont 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

doesnt keep track of its own business account, theres no way you can know

how healthy the company is.

Okie, lets say youve 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, youll have

to work on that first :-)

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Thats 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 shouldnt 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, its 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 considervery carefully if you can afford to part with the 5%. Even 1% is okie, as long as

its 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 theres an

increment of your paycheck or you are getting an alternative stream of stable

income which you dont 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.

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The higher 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, heres the chart on how it would have looked

like if youd followed the steps mentioned earlier- by allocating an X% of your income

into an untouchable fund.

Age

The

Magical X

Annual

Income

Income

Increment

Ratio

To be

Invested

Rate of

Return

Total

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

102%

$ 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

105%

$ 2,705.51 10% $ 28,427.1536 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

105%

$ 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

105%

$ 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

110%

$ 10,139.28 10% $290,127.80

51 15.0% $ 84,493.97 100% $ 12,674.10 10% $333,082.08

2010 www.meshio.com


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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

Heres the story behind the chart

This individual, lets 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 hes 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 didnt touch the money in the fund, the

accumulated interest at 10% has earned him RM 8,818.01 in the fund by the

time hes 30 years old.

Figure 1.0

Ban Huat continued this habit for many years to come, and when hes 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.

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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 automatedsaving 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.

2010 www.meshio.com


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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) Doesnt require much of a discipline, since you dont 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 out of the window?

2010 www.meshio.com


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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/2008/09/the-smart-guide-to-insurance-planning-for-

malaysians/

You can also follow him at his blog at www.meshio.com

2010 www.meshio.com
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