How much do you have in your savings? How much did it increase/decrease over the past few months? If your savings remained stagnant or even decreased, there is something wrong with your money spending habit.
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If you don’t even have an emergency fund saved up to pay up your immediate expense (eg $2000), this mean that you don’t even have enough to cover future expense or luxuries. What can be done to solve this? By paying yourself first.
I am a victim of not abiding by this rule as well. During my days in army, I was a section commander (3SG) earning around 1k per month from my NSF allowance. Each month, I would spend regularly on food at the Canteen/Mess, avoiding cookhouse food and taking Grab to book in/ book out just because I was lazy to take public transport and also buying expensive items online.
I did not keep track of my expenses and kept spending aimlessly, not worrying as I would be supplemented with my allowance next month. It was only until the last 4 months of my service where I realise my money management habit had a huge problem. Left with only 4 months of pay, I started looking back at how much I have been spending monthly and why my bank account remained stagnant months over months, even though I am getting 1k allowance every month. The reason why we are still not getting wealthier is because of Parkinson’s Law.
The Parkinson’s Law says that our expenditures rise to meet our income. When we earn more money, our needs become more and we end up spending more money. In order to even make wealth, we need to break the Parkinson’s law by setting limits to ourselves.
What’s the point of earning $20,000 per month if your expenses are $19,000? This is the reason why most people are rich, but they are not actually wealthy.
What’s the difference between being rich and being wealthy?
The simple difference between a rich person and a wealthy person is that a wealthy person has sustainable wealth. Simply put, a wealthy person will always be wealthy, whereas someone who is merely rich will only be so for a short period of time until the money is gone.
Hence, if you have a salary of $8000 as a 24 years old for example, congratulations. You are earning more than the average of your peers, but what about the liabilities aspect of your cashflow? If you are earning $8000 but your expenses are $7500, you only have a spare $500 every month to try and grow your wealth.
On the other hand, if you earn $3000 per month, but you always pay yourself first, and saves up 50% of the money into a separate bank account purely for wealth growing purposes, you will be left with $1500 to pay your liabilities every month. (mortgage/phone bills/groceries etc) By making this habit a norm, you effectively have a spare $1500 every month to grow your wealth.
That said, salary alone is inaccurate to gauge whether someone is wealthy or not. But it is no doubt a higher salary can allow you to live a flexible lifestyle and make it easier to grow your wealth and reach financial freedom.
The reason why most poor/middle class people today are unable to get out of the Rat Race and having to continue to work every day until age 65 is because they don’t buy into assets and have poor money management skills.
Most of us go to school to learn and master the skills we need for our job next time and be a good employee, (Excel skills/Coding Skills/Passing BAR/Getting your medical license etc) but fail to learn how to manage money because schools did not teach us how to do that. We are brought up believing that the only way to have a good life is to study hard, get a degree and work at a good company and retire at 65.
While this is what we are brought up to believe in, we do not have to adhere to it or even abide by how our parents or predecessors grew their wealth. In order to reach financial freedom as early as possible, we need to cultivate good money habits and invest into assets which generates income for us in the long run and reduce liabilities as much as possible. The more money goes into our pocket and the less money goes out of our pocket, the wealthier we will be and the more sustainable we can remain rich for the long run.
Assets puts money in your pocket while liabilities takes money out of your pocket.
Each of us have different financial thermostats and mindset when it comes to money. Poor people do not have the financial thermostat to manage a large amount of money, that is why the moment they win a lottery of $1 million for example, they spend it away just as easily the way they obtain it.
A rich person on the other hand, has the financial thermostat to manage a large amount of money, thus, when they manage to make their first $1 million, they spend even more effort than before to try and preserve the money and grow it even further through the owning of assets such as stocks/mutual funds/real estate or businesses.
So how do I go about paying myself first?
When I get money inflows from my side hustles or dividends/capital gains from selling stocks, I separate the funds into 2 different accounts. My Standard Chartered Jumpstart is my spending account which I will allocate just a small amount each month for expenses purposes.
Right now as I’m currently schooling, I do not need thousands in my spending account so I only keep a minimal amount which is my average expenses per month. I am also using DBS Livefresh Student Credit Card to build up my credit score and managing a small amount of debt which helps to build up my financial thermostat to deal with larger amount of assets/liabilities in the future.
As for my savings/warchest fund for me to grow my wealth, I put it into Singlife to earn the 2.5% which is basically free money and it acts as a warchest for my investments. Although they are changing it to 2% in November, it is still higher than any other banks so this will be my main savings vehicle.
Currently, 85% of my net worth are allocated to stocks/ETFs to grow for the long term. The remain 15% is kept for short-term liquidity purposes. This allocation is specific to me and my own spending habits only so you may differ in terms of how much you require and how much you allocate to your wealth building. (through owning assets)
By doing this, you guarantee that money are being socked away from yourself and building this habit from young can help ensure that there will be no impulse buying tendencies since you are constraint by the amount you set up for yourself to spend.
The more you can free up your cash for wealth building purposes, the faster you can attain financial freedom. If you currently earn $10,000 per month, aim to save at least 50% and put it into a warchest purely for investments to grow your wealth in the long run.
People often give the excuse “I will invest when I earn more next time” are basically like an obese person saying “I will exercise once I lose some weight.” So stop giving yourself excuses not to start because time can either be working with you or against you.
Take actions now and change your money management habits and pay yourself first. For me, adopting this habit has allowed me to increase my net worth over the past few months especially since the Circuit Breaker which allowed me to widen my savings rate and supplement my warchest to deploy into investing. The important lesson here for myself is that in order to grow my wealth in the long run, I have to remain disciplined in my spending habits and to always pay myself first before doing anything else.
Always keep in mind what are assets and what are liabilities, the more asset we own while we are young, the more the asset will return us in the long run. The more liabilities we own, the poorer we will be in the long run.
There is a reason why the rich keeps getting richer and the poor gets poorer and the fact is the rich holds assets while the poor holds liabilities. These are principles almost every personal finance book will mention.
Rich people don’t get rich by putting their money in the bank, instead, they buy assets such as stocks or real estate to compound their wealth in the long run. Out of Jeff Bezos’s multi billion net worth, only a small portion is actually in cash and the rest of his net worth are his shares in his own company Amazon as well as other assets.
So are you paying yourself first? If your bank account has remained stagnant over the past few months or years, it’s time to switch that bad habit away and start by paying yourself first.
If your pay increased to $5000 from $3500, don’t have the urge to spend more than before, instead, pay 50% (or more) to yourself first, so you limit the amount you have for your expenses and liabilities, while the rest are put into assets which pays you in the long run.
Seedly App (Expenses Tracker)
I currently use the Seedly app to track my monthly expenses, my inflows and outflows and my overall net worth since I can input my bank accounts, insurance and investments into the app to keep track and see the big picture. It is an effective way for me to manage my money and to have full control over money. Do check it out if you are interested.
Thank you for reading this long post which may be pretty whiny or sound like I’m nit picking at you. But paying yourself is a really powerful concept which I adopted and has helped me to improve my money management skills and keep more money and increase my net worth. I hope you take away something from this post and if you are curious to learn more, you can learn about these concepts in greater detail through books such as Rich Dad Poor Dad and Secrets of the Millionaire Mind. Both are extremely great at brining across the importance of personal finance and having a strong and powerful mindset.
The concepts I mentioned above are inspired by the 2 books and it always reminded me to be disciplined and stick to the long term. If you have any more questions, don’t hesitate to reach out to me here.