Tuesday, 4 August 2009

Grow Your Money 2 : How Much Should I Save?

My previous session mentioned about training your budget to have savings minimally 30% from your income. Just like me, I believe there are a lot out there would agree that this portion for savings is not only non-achievable but would drastically suffer our lifestyle for the sake of savings.

Let me derive more clearly where that 30% should go:

Retirement savings (10%)
  1. Especially for those who do not have pension plan from their employer, having a retirement savings is critically important.
  2. You need to understand what will be the age you plan to retire and how long you need to live after retired. Consider also the monthly expenses that you will need to have after you are retiring.
  3. For my example, let say that I planned to retire at the age of 55 years old and plan to live 25 years after that. I plan to live a very comfortable life with expenditure of $2500 per month. Due to this plan, I would need $2500 x 12 months x 25 years of accumulated cash which bring me up to $750,000. That would be my long term goal if I plan to have a good retirement year.
  4. For retirement savings, it is recommended to set aside 10% of your current income in order for you to achieve that goal.
  5. Advisable to keep that savings under compounding investment for low risk, long term investment. That would further help you to grow your money so that you able to reach your goal faster.

Emergency savings (20%)
  1. We do not know when we might need money for emergency.
  2. Of course we might have insurance that cover almost all aspect of our life, but no one can really determine if any emergency that we might encounter will be covered by the insurance or not.
  3. Advisable to stop taking unnecessary insurance, instead keep that money for own emergency.
  4. Guide for a good savings habit, is to set aside 20% from your income.
  5. Set a medium term goal for this. Try to accumulate enough emergency savings that can covers 8 months of your current income. If anything goes wrong especially affecting your income, at least you will have around 8 months period to get your life back on track.
  6. In order to ensure that emergency savings remain available for you, keep them either in savings account or invest in low risk with high liquidity investment (such as gold or unit trust). Locking your savings into Fixed Deposit for example, is not recommended because of the mature period needed before you can withdraw your money.

However, if you are like me, it is tough to keep 10% for savings, moreover 30%. My advice, if you cannot nurture the money, please starts by nurturing the habit. Early each month, once you get your salary, prioritized to set aside some amount for savings, even if less than 10%. In Malaysia, for Maybank users, you can directly send your money to ASB account through Maybank2U online. You can even setup Standing Instructions (S.I), so that the bank will automatically set aside your money for savings. Once you have done that, do not easily reach for that savings account if you need money. Rules of thumb, use the money only for investment (for growing money) or for emergency. Make sure to reset your idea of emergency, because buying anniversary present, go to saloon for hair coloring before company dinner and change your car sport rim after 3 months old, are NOT consider emergency.

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