HABIT #2 - REWARD AND INVEST FIRST
Habit #1 of wealthy and comfortable people suggested that we grasp and understand our numbers. Assuming you now have this understanding then Habit #2 should be implimented. Understanding this strategy is critical. I wish I had of implimented this habit a lot earlier in my life cycle than I have.
So what does Reward and Invest First mean? Generally we receive our income on a regular basis - ie weekly, fortnightly or monthly. Reward and Invest First is the habit of taking your determined saving amount from your income first, before any other funds are distributed. I hear some say that the mortgage, bills and food should be paid first. Not so! If you Grasp your numbers (Habit #1) then the structured process of distributing your savings first works wonders. Why? Pay yourself first.
Let's assume I have a young person approach me for advice who earns net $1,000 per week. They have determined via habit #1 that they have bills averaging $150 per week, rent of $300 per week and general expenses/discretionary expenses of $250 per week leaving $300 left over. I would recommend they open four bank accounts (fee free of course)
- Transaction Account (Salary account)
- Bill Account
- Oh Bugger Account (For those moments in life)
- Savings Account (Break glass to enter)
So your salary of $1,000 is credited into Transaction Account. Immediately transfer the $300 left over as follows - $270 to savings and $30 to the Oh bugger account. Only once this is done can you then distrubute your funds to the bill account, pay rent etc.
We suggest you do this to get the savings out of the 'system'. Let's learn to live on the $700 per week. Operating from one account and not paying yourself first will result in leakage of your money. Oh....I have $400 left over.....brain starts justifying new shoes, dress, big night out etc. It's how our brains are wired to think.
What function does an 'Oh Bugger' account deliver? One of the main occurances of credit card debt, particularly with younger people, is when an Oh Bugger' moment occurs. Fridge shuts down, car breaks down, large fine etc. We set up the oh bugger account to ensure we a small fund to cover these events which unfortunately do and will occur in life. The oh bugger fund also stops us delving into our savings.
You can also add additional accounts if needed. I personally have a holiday account (another event many people require a credit card to undertake) which I distrubute income into each month so I can enjoy my holidays enjoying MY money.
As your savings begin to accumulate and earn interest a great thing occurs - It's called the compound effect and that is Habit #3 which we will discuss and publish in the next couple of weeks, as I'm about to use some of my holiday fund for a much needed break.
Dwayne Brittain, Dip Mortgage Broking, Dip Financial Planning
Mortgage Choice in Wantirna and Boroondara
Ph: 03 9432 5484, Fax: 03 9432 5845, Mob: 0428 434 084