Friday, 1 August 2008

How do you allocate your money?

I had a breakfast meeting with my friend one day and he asked me how one person should allocate his money.

I thought this is an interesting topic to post here so that everyone can benefit.

There are 3 types of people in this world:

Type 1: Spend more than they earn

Type 2: Spend all their income and save if there is any balance

Type 3: Save first then spend the rest

We'll discuss Type 3 people today since they will be the only group of people that have predictable and regular saving to fund a proper financial plan. (I'll discuss Type 1 and Type 2 of people separately.. do keep a look out on that!)

Given an ideal case, one should save at least 50% of their total income and spend the rest on their living expense but in reality, if you can save 30% of your total income and spend the rest, you'll be in the above average group.

Let says you can save 30%, how should you allocate the saving?

1) Save 10% for liquidity meaning in banks or other safe instruments (e.g. Money Market Fund)where you can withdraw your money for emergency or during retrenchment. How much will be enough for this portion? Normally ranges from 6 months to 2 years of income depend on how much you feel secure. However you should continue to save this 10% even after you meet the 6 months to 2 years limit, so that you can channel it to other resources when the timing are right. E.g. Cars, Education, Property or even Business Opportunities.

2) Save 10% for investment. This investment can be in liquid asset or fixed asset.
- Liquid asset means Equity like stock and shares, unit trust, fixed deposit etc.
- Fixed asset means Property, Art Work, Gold or other Collector's Items.
This portion will help you to grow your money to fight against the silence killer called "Inflation"

3) Last but not least, most people do not like to do or never thought of doing is to save the balance 10% for your insurance. This 10% of your saving is use to protect the other 90% of your monthly income and your future potential income.

Hope this piece of information is useful to all my reader!

Until my next blog... all the best things happen!

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