We all know the basic rule of accumulating wealth. Save more than you earn and invest what you save. Just ten words but it is so difficult to do it well. However, as in everything that sounds simple on the surface, the real picture is always more nuanced and requires more much more detail and thought. Here are 5 rules of building wealth that everyone can work on.
1) Track what you earn and spend
I am always amazed by how most people do not know how much they spend on various needs and wants each month. If we do not track what we earn and spend, how can we possibly create and follow a financial plan? So do buy an expense tracking app or software right away if you do not have one. It can cost as low as 1.99 for a smartphone app or up to $100 for a desktop software like Microsoft Money or Intuit Quicken. Once you have the infrastructure, make it a habit to enter all your expenses and income into it. This will allow you over time to track what you spend on each category and to know where your cash is going each month, quarter and year. After a while, you may find it a nuisance to key in small sums. The good news is that you are not audited like a business, so you can always make a rule to only key in expenses above $10 and have the rest classified as miscellaneous or cash withdrawals.
Equally important, by tracking your income from salary, rent, dividends etc. You will also be able to accurately know how much of your income is passive and active and also project cashflow. This can come in very useful when deciding whether you have enough money to invest in an asset down the road.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
2) Create a monthly and annual budget
Once you have clarity on where your money is going and what is coming in, the next step is to bring it under control by setting clear budgets on major categories. I am a firm believer in the 80/20 rule. So to avoid spending too much time, just set clear budgets on your top 5 to 8 categories. These should account for 80% or even 90% of your spend. If you are like most people, it will comprise of categories like Transport/Petrol, Insurance, Groceries, Dining Out, Entertainment, Telco/Cable, Utilities, Rent/Housing Installment, Car Installment, Education etc.
Then the next step is to monitor and make sure that on a monthly and cumulative basis, you are keeping your spending below the budget. Needless to say, your budget spend should be less than your monthly and annual income. The extra left over is your saving.
3) Build up a saving buffer
It is a common saying that we should save at least 6 months worth of expenses as a buffer. So if you spend about $3000 per month, you should accumulate at least $18,000 in savings before proceeding to invest. Honestly, i am not so sure this is a must do and seems to be a one size fit all recommendation that just gets parroted everywhere. The idea is that you should not find yourself strapped for cash and so have to force sell assets at a loss or borrow from undesirable sources at crazy interest rates. That makes sense to me. So whether you keep 3 months or 6 months or 12 months, i think is really up to you.
Good luck and have fun!