How To Start - A Simple Guide

 

Some of you maybe wondering how to even start on this journey. Simply saying that you should increase your passive income and reduce your expenses to achieve Financial Freedom maybe too vague for some people.

Passive Income - Expenses > 0 = Financial Freedom

So let's start with how to accumulate funds for investment. I've read a lot of financial self-help books and the following split of net salary is my favourite so far.

10% - Investment Account
10% - Play Account
10% - Long Term Savings for Spending
10% - Education Account
10% - Give Account
50% - Necessities Account

However, the following split is my recommendation when you are starting up. Every time you receive your salary you must split them based on the following %:

35% - Investment Account
  5% - Play Account
10% - Long Term Savings for Spending
  0% - Education Account
  0% - Give Account
50% - Necessities Account

Let me explain myself.


Why do I reduce the Play Account from 10% to 5%?

Every battle requires sacrifice. We have a Malay proverb "bersusah-susah dahulu, bersenang-senang kemudian" which means you need to work hard and suffer first before you can enjoy the fruits of your labour.

The opposite of that is "biar papa, asal bergaya" which means you would rather be broke than not keeping up with the Joneses.

If you prefer the latter, you are reading a wrong book!

I've kept 5% as a motivation. Face it, deep down we are all babies. We like to receive presents, even from ourselves. You may however use it to spend on yourself or spend it on people that you love. So long as it makes you happy.


Why do I reduce the Education Account from 10% to 0%?

We are lucky that we live in an era that almost all information is at your finger tips. Once upon a time, books are only accessible to the privileged class.

Now with World Wide Web, the collective mind of the world is available to you free of charge! You just need to know where (and want) to search for it.

This book for instance is sharing my 18 years experience of personal wealth management, which is available to you for free. I am willing to spend many (many) hours of my life to share my knowledge with you.

This is part of my "Give Account". There are millions like me around. We are more than happy if our experience in some small way can be used to help others improve their lives.

So why do you then need to spend money (that you don't have) for knowledge that is unselfishly given by so many people free of charge?


Why do I reduce the Give Account from 10% to 0%?

You have paid your taxes. So technically you have given to society. In Chapter 1, I've mentioned about karma. What goes around comes around. I am a total believer of that.

What I don't believe is charity equals money. Let the authority takes care of the poor’s food and lodging with our tax money. It is their job to take care of the people who voted them in.

What you need to do as part of your "Give Account" is what the authority cannot do, volunteer your time and energy.

Spend time with the underprivileged. Make them happy with your love and attention. Be kind to the elderly. Provide free tuition to the poor kids. Donate free t-shirts that you keep on getting from your company. Clean up your closet and life of unused stuff, somebody else may find better use of them.

All these are almost free. If need be, you can utilise some of your "Play Account" for this purpose. There are many ways to skin the cat. You just have to be creative.


10% - Long Term Savings for Spending
 

This is your Emergency Fund. Not to be touched under any circumstances except for the loss of job. Ideally you should have 12 months last drawn net income in this fund. Once you have that sum, you can stop putting money in this account.  

The 10% share should then be diverted to your Investment Account. You just need to top up whenever you get salary increment so that it will always be equal to 12 months of your last drawn net salary.


50% - Necessities Account
 

This account is where you source your living expenses. You should also include unplanned expenditure like burst pipes in here. If you want to get married, this is where you have to source the fund too.

Thus, even though you allocate 50% of your salary for this account, you should only spend 80% of it. 20% should be for unplanned expenditure.

Did I hear a groaning sound? I never said that this is going to be easy.

If you are really serious about being financially free, you must always live below your means. There is no avoiding this. You must internalise the habit of living below your means, even after you have reached the coveted "Financial Freedom" status.


35% - Investment Account

This account is what I call The Untouchables. This is a one way street capital highway. Always in, never out. All the passive income derived from this account need to be reinvested.

Remember your new best friend - the compounding principle? The more you reinvest, the faster you will be financially free.

Until you achieve "Financial Freedom" status, your focus is to grow this account. Any extra money that you get must go to this account without fail.

Even though this is going to be tough, try to have some fun while doing it. Be creative. Humour can help lighten the burden.

“I wish you humour and a twinkle in the eye. I wish you glory and the strength to bear life's burdens. I wish you sunshine on your path and the storms to season your journey.”
― Robert A. Ward