Lesson 7: How to distribute your money?
It is shocking to find that 70-80% of working adults have credit card debts. Recently, we read from newspaper that more and more Malaysian youngsters are getting into a lot of financial problems due to credit card debts.
Bankers would tell you one thousand and one reasons for you to have what they call 'auto-debit' or 'standing instruction'. They advise you that for your convenience (or maybe their convenience) , they would debit your saving/current account to pay off your home mortgage, car loan every month. You should not get yourself trapped by signing the agreement, don't you find it is ridiculous for the bank to 'get a taste' of your hard earned money every month before you even have the opportunity to hold the money?
Therefore, always remember to 'pay your self first' every month after you get your pay check. I would always suggest to you distribute your salary every month by saving 10% of your salary as 'emergency fund' (you should have at least enough saving to cover your expenditure for 3-6 months should you lose your job), another 20% for investment and only 70% for your monthly expenditure (everything you spend a month- including your home mortgage, credit card debt and car loan!)
If you tell me you can't even save 10% of your saving because you have to pay your debt, then I must say that you are the type of person whom I call ' Generation X who is living in credits', cut down your debt and never try to buy things using your credit card anymore!
It is shocking to find that 90% of us like to buy things we actually do not need. If you are earning two thousand a month, do not live in a house that costs you one thousand a month to pay as home mortgage. Always take into consideration your income before spending a cent!
After you have saved enough for your emergency fund, then you can increase your investment to 30%. I would talk more about what types of investment you can put in your money in future posts.
A lot of people ask me should they pay their debt first or invest first if they have extra money. I always tell them, after having enough money in your 'emergency fund', then you should consider what is the interest rate and projected return of your investment before you decide to put your money in investment or settle your debts. For example, if you think you can get a return of more than 18% a year by putting your money in stock markets, then you can delay paying back your credit card debts since banks charge you 18% per annum for your credit card debts.
Therefore, I would advise you at least settle you credit cards loan first before you even think of investment. I do not think you can get 18% return in any investment in this world except you are investing with Warren Buffett!