Financial Management Lesson 1
The Differences Between The Rich And The Poor
If you have ever read articles or biographies that examine how wealthy and successful people got to where they are today, you might have noticed that these people tend to have mindsets and habits that are significantly different from the majority of people.
And one of the key differences between the rich and the poor is the way how the rich manage their money differently from most people.
For example, the majority of people tend to spend their salaries first and save whatever is left over. The trouble with this strategy is that most of the time, there is usually very little or no money left at the end of the month to save.
On the other hand, the rich tend to save a portion of their income first before allocating the rest for spending. Even though this might seem like just a minor tweak, when given enough time, this strategy will allow one to accumulate enough savings to invest in assets which can in turn will generate more wealth in the future.
So what are some guidelines on how much we should save and spend every month? According to T. Harv Eker, author of the book “Secrets of the Millionaire Mind”, one can consider allocating our income to the following 6 portions:
Necessities – 55%. This amount is used to spend on necessities such as food, transport and utilities.
Play – 10%. Money in this amount is spent to pamper ourselves. For instance, we can spend it on a massage or an expensive dinner and so on. Ideally, we should finish spending this amount every month and not feel guilty about it, so that we are conditioned to feel good about having money and spending it.
Give away – 5%. We can use this money to donate to charity or help someone in need.
Education – 10%. Money in this account is used to spend on books or seminars so that we can constantly upgrade ourselves and stay relevant.
Long-term Savings For Spending – 10%. The money set aside is used for big ticket items such as purchasing a house or funding a child’s education.
Financial Freedom Account – 10%. Last but not least, the money in this account is used for acquiring assets that can generate passive income streams for us. As the size of this account grows, the passive income streams tend to get larger too. This is the key to getting out of the ‘rat race’.
