In order to secure our financial future, we must develop good financial
habits. Of course, like any other habit, the younger you start, the
better. This is because when you’re younger, any financial mistakes you
make are less critical or costly, and usually reversible.
But even if you’re no longer that young, carefree college student, you
can still incorporate these positive habits into your life.
The
best way to start is to remember these three basic financial habits:
conscious spending, disciplined savings, and planned investments.
Conscious spending
Is there such a thing as “unconscious spending”? Of course, there is! And we are guilty of it almost daily.
Go through your daily activities one by one, from the moment you woke
up. Did you switch off the air-conditioner, fans, and any lights before
you left the house? Did you keep the tap running while you brushed your
teeth? Haven’t you heard the saying that if you can’t take care of the
smaller things, how can you take care of the bigger ones?
Now, take special notice about how you spend your money the moment you
step out of the house. Did you drop by your favourite coffee haunt? What
about a cigarette or two, if you smoke? What about lunch? Is the RM40
steak a once in a while treat or is that your daily budget for a meal?
Do you see my point?
There are also other unconscious yet pre-planned spending, like unused
gym subscriptions, cable TV stations that are hardly watched, magazines
left mostly unread, etc. If you can cut down on such unconscious
spending and add a bit more consciousness, you’ll have more control over
your budget and your money will be much better spent.
Disciplined savings
So, if you can start by being a little more conscious about your daily
spending, you’ll soon see more money left at the end of the month. The
unconscious, spendthrift part of you will slowly change, and you’ll
start wondering how you can save even more. This is going to happen once you are more conscious about your spending patterns.
To discipline yourself and save more, save
your money even before you spend it: Put away 10% of your monthly
income into a savings account. If your earn RM2,000, that’s RM200 a
month and RM2,400 in just one year. At the end of the year, it will be receiving more than one month’s bonus!
Planned investments
If you are able to practise both the earlier two habits well, you are
now ready for the third habit, which is growing your savings.
Money saved in jars earns 0%; a savings account does not help very much
either: at an interest rate of 0.5%, your money only doubles every 144
years! Really. This is called the Principle of 72, a simple formula to
calculate how many years your money will double by dividing the number
72 with the interest rate where your money is kept.
Practising those two habits and saving money is not going to secure your
financial future, obviously. You need to grow your savings faster than
the increase of prices of the goods that you buy. That’s called hedging,
or protecting against the eroding power of inflation on your money.
One of the best ways to grow your money is to put your savings, either
on a monthly or quarterly basis, into an investment account that
capitalises on the different prices of different goods and services at
different times (this is called cost averaging).
Preferably, your planned investments are done automatically (or
unconsciously), deducted directly from your savings account monthly.
This makes sure your financial future is on auto mode, and there is less
room for indiscipline or the lure of mega sales.
Putting money away in an investment
account gives you higher rates of return: over time (five years or
more), it can be as high as 7% or 8% a year. Applying the Principle of
72 again, that doubles you money in about nine to 10 years, rather than
144 years in a savings account!
So, in summary, be more conscious about how you spend your money, start
to be disciplined in saving some of it, plan how to grow those savings,
and you will be well on your way towards a secure financial future.
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