This article is to provide some practical information on how one person should set up and manage their personal accounts. Having the right setup will give you the discipline and longevity you need for a better financial system to accommodate the 5-step “Money Wheel” and your financial goals.
We previously spoke about the 5-step “Money Wheel” for overall personal finance planning. Now it comes to what actions you need to take to start in real life. Should you open an account with a bank or a Fin-tech? Where do you save for your emergency funds? You can’t have the discipline in reducing your overspending if you do not separate the accounts. It means you will always tap into the wrong accounts for your spending habits, which will lead to withdrawing from the accounts which you save and invest in for your future goals.
A lot of us actually complain that we live paycheck by paycheck, some of us can save, and some don’t. If you have this mindset, you will be falling into the trap of never saving enough for your future life or your retirement.
We are going to share with you some basic steps in setting up your accounts. This way, you can guarantee that your future will forever thank you.
We recommend you start with having 3 separate accounts.
The first account (Account 1) could be for your salary, or income if you have multiple sources. You will need to set up the automated debit of at least 20% from this account and transfer it to Account 2. Note that we recommend automatic debit because you might forget to transfer, or lose the discipline for the saving requirements. The debit automation will act as the “blind” action because if you do not see the money, your bad habit will not tap into it for unnecessary spending.
Once the 20% goes to Account 2, this account will serve as your Emergency fund. Imagine if you do not have this fund, and you unexpectedly lose your job, you won’t be able to overcome the financial circumstances. We recommend 3-6 months of your salaries for these Emergency funds. If you happen to have debt, use this account to pay for your debts. Please note that this account has to always be in the “Full” mode. Meaning if you happen to tap into this account, you need to refill it before you can save and worry for Account 3.
Account 3 will be used for investment growth, and it should fit with your investment strategies which we will share more about our step 4 of the “Money Wheel” – Investment. This account can be used to buy investment funds, investment-linked insurance, term deposits, buy securities, or even save toward your first property.
Where can you consider setting up these accounts?
We recommend starting with 3 accounts but you can have more or less depending on your financial needs. The recommendation is based on the consideration of time management and the efforts you have to put in to control your money inflows and outflows. By setting yourself up in multiple accounts might lead to complications if you forget later, or do not have time to manage all of them.
Dealing with cash is no longer the way to grow your assets in this time of age. And remember you can never reach your financial goals by keeping the cash. The finncial goal is a long-term goal and assets can grow over time even when you sleep.
For example, you are making 1,000,000MMK/month. By putting aside just 20% per month (200,000/month) in the saving account to invest, with an estimated of 10% annual return*, you will grow your money to:
- more than 3X (of your original amount) to reach 15,300,000 MMK in 20 years
- more than 6X to reach 45,500,000 MMK in 30 years
- more than 13X to reach 127,500,000 MMK in 40 years
The growth rate is significant the longer the tenor, says after 5 years of saving and investing, thanks to the compound interest. We will talk about compound interest and why it is “The 8th Wonder of the World” according to Albert Einstein in later articles.
*calculation is based on compound interest and 10% annual return is only for reference. You need to speak with a professional advisor to find the appropriate rates in the current market.