Everybody wants to get rich someday and be able to achieve all of their financial goals. Some might try their luck every week buying lottery tickets, while others would choose to work hard at their careers to generate the level of wealth they desire.
Both options are fine – either you are extremely lucky or you are prepared to put in your time and effort in exchange for money. However, there’s a third option that most people neglect: We can make our money work hard for us as well!
In this article, I will explain how you can do this using two concepts to illustrate my point.
Left Pocket – Liquid Savings
Right Pocket – Rolling Savings
There are three simple steps that will help you make your money work harder for you in order to achieve financial success.
Step 1 – Managing your Cash Flow
If you want to reach your financial goals, it is critical to understand the concept of cash flow. Simply put, this is the amount of money coming in versus the money going out. Managing this flow properly will ensure that you do not overspend and save enough to reach your targets. There are only two ways of increasing your cash flow: Increase your income or reduce your expenses.
If you find it difficult to save because you are spending too much every month, you have to start budgeting for your expenditure. If not, you will not be able to achieve your goals. This is especially true if you have just started working and have little savings. At the start of your career, there is little opportunity for you to increase the amount of money coming in. However, you can control the money going out.
An important rule to follow is to save first then spend, instead of the other way around. When you get your monthly salary, start by putting money aside first. You are then free to spend whatever is left over. This reduces the risk of you overspending each month.
Step 2 – Create Two Pockets
You may have heard of the envelope method of budgeting from a long time ago. This involves putting your monthly salary in an envelope, taking out what you need for your monthly expenses, and leaving what’s left inside for you to spend.
That is a great method, except the that it only deals with the money left in the envelope. How about the money outside the envelope that is meant to be saved? My answer to that: “Put it in your pockets!”
Create two different pockets for the money you have left over after expenses. The Left Pocket is for Liquid Savings or money that you want the flexibility of being able to spend at any time. These are usually placed in fixed deposits and bank savings accounts that offer low-interest rates, but is low-risk and available at any time. These funds should be used for emergencies or for expenses you expect in the next 3 to 5 years, and be easily accessible whenever you need it.
Meanwhile, the Right Pocket is for money that you do not need in the short term, and want to roll forward into the future to generate higher returns. I call these Rolling Savings, which are usually invested in higher interest-bearing instruments. These can include Unit Trusts, Exchange Traded Funds, Insurance Endowment Plans or even higher-risk investments like stocks or bonds.
The funds in the Right Pocket should be reserved for financial goals that will take more than 5 years to achieve. The higher returns generated in your Rolling Savings will also help you achieve those goals more easily.
Step 3 – Allocate and Save
Once you determine how much needs to go to the Right and Left pockets, and which instruments to place the funds in, the final step is to ensure that you allocate the right amounts every month to the designated accounts.
To make sure that you stick to your plan, it is a good idea to transfer your savings into their respective accounts on the same day you receive your salary. This is to ensure that you are not tempted to spend the money before saving it!
It might be helpful to have a standing order with your bank to help you do the transfers every month on salary day. That way you won’t have a chance to touch the money before is saved.
And if it happens you have excess cash savings in the Left Pocket that you might not need in the short term, you can always transfer it to your Right Pocket by investing it in a higher-interest instrument.
Taking these three simple steps will help you be better prepared for the future. Having too much cash in your Left Pocket means that your money is not working hard enough while having too much cash in your Right Pocket indicates that you might not be prepared for emergencies or be able to reach your short-term financial goals. You need to have a good balance of cash in both pockets to ensure financial success!
It’s not just about budgeting for expenses but also how money can work for you. Control savings, not just expenses.