Life lessons – once learned, never forgotten.
1. BREAKING DOWN FIXED EXPENSES AND VARIABLE EXPENSES.
Every month the bills start rolling. Look at each bill and see if you need to pay this type of bill every month. In that case, this is your fixed expense. It can be the same amount or fluctuate month to month. Such expenses like rental or mortgage bills, utilities, insurance or car maintenance. Variable expenses are miscellaneous items like emergency hospital treatment, shopping bills for handbag, jewellery or new fridge. It is easier if you use a computer software program like Excel or Open Office Math to tabulate the total expenses for Fixed and Variable Bills. My personal preference is to write it down on a piece of paper and calculate manually. Longer process, yes, but it just reinforce the situation.
2. NET SAVINGS
Your monthly salary less fixed and variable expenses will give you the Net Savings. This is where you can channel net savings in various ways. One way is to use some of the net savings to buy an endowment plan.
3. ENDOWMENT POLICY
Insurance policy comes in many forms. Even if you don’t believe in insurance, an endowment policy works to your benefit. How? An endowment policy is an insurance plan and also a savings plan. Two for the price of one deal. The basic insurance coverage could be for death and permanent disability with a rider like critical illness if you wish. You will pay a premium for the first two years or so, depending on the policies taken, then the savings function kick in. Suppose you pay a monthly premium of $150. On the second anniversary, you will get a cheque of $1500 from the insurance agency. Again this depends on the endowment policy you have signed up. That is extra earning. You can go on holidays, buy a new wardrobe or whatever you wish. If you don’t need the money, leave it to grow and earn more interest.
4.OPEN ANOTHER BANK ACCOUNT
Why do I need so many bank accounts? First, the bank account where you draw your salary is now called the Expenses Account. A separate account will allow you to save each month regularly. Once you have bought an endowment policy, re-classify this expense under fixed expense. The Net Savings will show a reduced amount but that is ok as you still have some balance. Every month, without fail, upon receiving your salary, transfer the Net Savings to your new Savings Account. Better yet, open a savings account where the bank can transfer the Net Savings automatically from your monthly salary. For the first few years, it may be better that the bank has no restriction policy in case of withdrawal. Emergency does happen. You never know if one day the fridge breaks down and you need a new one immediately. Any bonus at year end, first thing to do is transfer the bonus to the Savings Account.
5. NEXT YEAR OPEN ANOTHER BANK ACCOUNT
Why? Because now you are ready for the next step and it is always wise not to put all the eggs into one basket. Look at the Savings Account. By now, it has build up quite nicely. Next, open another bank account. This time, the purpose is not to withdraw any money at all from this account, if all possible. Call it your Retirement Account or Reserve Account, if you will. Banks and insurance agencies have various plan. Shop around. If you don’t want the hassle, just open another Savings Account. To avoid temptation, choose an account with a lock-in period. This usually means that should you withdraw money before the maturity date, a penalty will be charged. A two-year lock-in period may be ideal. You decide. After the maturity date, either transfer the money to the regular Savings Account or let the bank automatically renew the account for another two-year period.
Open as many new accounts as you wish when you have more Net Savings. This way, you never need to owe money for the credit card bills. Going on that dream vacation is guaranteed and there is always spare change for emergency.