5 Steps to Make Ensure You'll Pay Yourself First

Every financial gurus will say that you must pay yourself first, no matter what. The guideline is always 10% of your take home salary. This 10% need to be used for investments.

But, many find it’s difficult to save that 10%.

Some could save it, but then they’ll withdraw those money for some expenses and emergencies.

So, I have a solution to ensure those money are not touched unnecessarily. This will work flawlessly for fixed income earners.

Check out the Jars System which I believe is the best money management system, if you want to go beyond just paying yourself.

Step 1: Decide that you want to pay yourself.

Without a decision, nothing will happen. You must decide and commit that you will pay yourself 10% every single month, and that money, you are going to use it for investment, not for expenses.

You must be ready to run your life with 90% instead of 100%.

Step 2: Open a new banking account

You are going to keep a separate account from your salary account. This will help you to manage your money more efficiently. You can tell exactly how much you have in that 10% account.

To ensure you won’t withdraw money unnecessarily, the new banking account need to be from a bank where its branches are located furthest from your home or office. It should not be within your usual driving path as well.

If you already have an account which you can use for this, make sure its far far away..

Here are some suggested banks you can consider as there are not many branches around:

Nova Scotia Bank, Kuwait Financial House, Al-Rajhi Bank, UOB, OCBC, HSBC, Citibank, Standard Chartered Bank, Affin Bank, Alliance Bank, Bank Muamalat.

Step 3: No ATM card.

Yes, no ATM card for your new account. This will ensure you’ll be in control of not withdrawing the money anytime of the day or at any ATM. 

If you already have it, cancel it.

Step 4: Automate

Set an auto transfer from your salary account into your new account. Schedule it every month a day after your salary day. Remember to update the amount whenever you have increment or a higher salary from a new job. For bonuses, transfer 10% of the bonus as soon the money is.

Step 5: Educate yourself to grow.

What’s the point of saving them if you don’t know how to invest?

Explore and learn how you can expand your money. No point the money just sitting in your account. Grow them by applying what you have learned.

Remember that the 10% is the minimum. You can do with 20% as well, just ensure your basic needs are meet and your are not stressing yourself.

If you follow the Jars System, you can have 6 separate accounts as well. The NEC account can be the salary account. The rest into separate accounts.

The Jars System - An effective money management system

I first heard of this Jars System while attending a seminar, Millionaire Mind Intensive back in 2008. It was created by T. Harv Eker and I would say it one of the best money management system ever. I'm writing this article as a review for myself as well to help others to realize there are ways to manage your money. For more details, I would recommend you to attend the Millionaire Mind Intensive which will is coming very soon to KL. Check it out at this link, http://www.millionairemindmy.com/. I'm not affiliated with them, I'm just sharing what I believe is one of the best program out there and it's really cheap.

So, what is the Jars System? It's a system where you split your salary or income into 6 different portion for 6 different purpose. These portions are "Jars". It is meant to have a balance fulfilling life with the goal of financial freedom.

Each of the Jars need to have certain percentage of your money in it. What are the 6 Jars?

First Jar: The FFA Jar (Financial Freedom Account)
Portion of your salary - 10%
This is the pay yourself first account. The money from this account can only be used to generate passive income, which means for investments, properties, business and anything which can generate incomes passively for you. You should never spend this account for expenses.
The 10% is the minimum, you can put more than 10% if you have the money and have fulfilled the minimum requirement of other Jars.

Second Jar: The NEC Jar (Necessity Account) 
Portion of your salary - 55%
This is where your necessity expenses are paid from. Your rent, loan, food, cloths, bills, petrol and so on. It is something you can't live without. If you are a smoker and can't live without it, then it should go here.
The 55% should be the maximum.

Third Jar: The LTS Jar (Long Term Savings for Spending)
Portion of your salary - 10%
You have been eyeing those 100" Curved OLED TV, but it's very pricey, or you want to go for a 9-days cruise to Alaska which costs you more than RM10,000. So, this is the account you use to save your money up.
The 10% is the maximum. If you have more than 1 things you want to buy, then split this account further.

Fourth Jar: The EDU Jar (Education Account)
Portion of your salary - 10%
This Jar is for you to grow yourself. It is used for your own education. It can be used to attend a seminar, buy a book (non-fictional, of course), taking up a skill. If you don't grow yourself, you'll end up rotting yourself.
The 10% is minimum.

Fifth Jar: The PLY Jar (Play Account)
Portion of your salary - 10%
This is the account you must entirely and splurge yourself. Use it to pamper yourself, go for a spa, buy an expensive cloths, shoe, dine in at an exclusive restaurant, do whatever you desire with this money. Now, you may ask, why do I need this account? Everyone of us have an inner child, the one which need to be pampered. If we try to be very strict in saving and never enjoy our life, we could end up doing something silly and ending up losing all our savings.
The 10% is a must, no maximum or minimum. If what you desire is worth more than 10%, then you can keep the money up to maximum 3 month's Play Jar and blow them up.

Sixth Jar: The GIV Jar (Give Account)
Portion of your salary - 5%
This is where you give away for charity.
Giving money to your parents is not charity. That should come under NEC Jar.
The 5% is minimum.

Here is an examples:

If Malik take home salary is RM5,000. This is how he should divide his money into. Btw, take home salary means your salary after all the deductions such as EPF, SOCSO and Tax.

The biggest question would be, my expenses are beyond 55% of my salary. Then, what do I do?
In fact, this is the biggest stopper for many from starting to use the Jar System.

If your expenses is more than 55%,

Option 1: Reduce your expenses. At times, some of your expenses could actually fall under LTS, EDU, PLY, GIV jar or even the FFA account itself. So, identify which expense goes into which Jar. You can even eliminate certain unnecessary expenses.

Option 2: Earn more. Find a better job. Find a part time job or business.

Option 3: Have at least the FFA Jar even if it's less than 10% of your salary. Make it a habit to pay yourself first. Slowly grow from there.

The GIV Jar, if you don't have enough money for it, you could spend your time instead to do charity. Volunteer yourself.

How about married couples?
I'll touch that in the future. I have my own take on it.

Or, for more details, please attend the Millionaire Mind Intensive.

I'm debt free... financial freedom!? Part 2 of 2

(Click here for Part 1)

Mr. Leemubu, is a humble man. He leads his life comfortably with his wife, Eliza and 2 children, Sam and Dash. Sam is studying engineering in UK, while Dash is studying medicine in Australia. They are staying in a single storey house which is on mortgage and a fully paid compact car. Mr.Leemubu and his wife bring back home $20,000 from their job.

Since Mr.Leemubu started to work at the age of 24, he saved almost 20% of his salary every month, and now he is 45 years old. Even thou he had the money to pay off his mortgage, but he didn’t. Instead, he invested part of his savings in stock market and the rest in low cost apartments. For his apartments, he only paid 50% down payment and the rest he took mortgage. Whatever money he gains from his investments he reinvests them by buying more stocks or properties, and he took more mortgages to cover his properties.

One fine day, Eliza received a phone call from Mr.Leemubu’s office. She was shocked. Mr.Leemubu admitted to hospital. Eliza rushed to the hospital and found out he had a stroke and paralyzed. Eliza was worried. She was worried about their financial commitment, as her salary is only $7,000 and it’s not enough. She was worried on how to support their children’s study. Mr.Leemubu is released from his job as he is unfit to work. But, Mr.Leemubu wasn’t worried at all.

Fast forward into the future, Mr.Leemubu had recovered almost 90%. His recovery rate was quite fast, thanks to his wife’s loving care. Eliza quit her job just to take care of him. His children had completed their studies and back home. Their house is still their and in fact they are planning to move to a bigger house. How this can happen? Isn’t Mr.Leemubu had a lot of debts due to his mortgages? Even Mr.Mubulee, who was debt free, could get into a personal financial crisis. How did Mr.Leemubu and his wife,Eliza manage it?

The answer is Mr.Leemubu’s idea of financial freedom is totally opposite of Mr.Mubulee. Even thou he had a lot of mortgage; his passive income is equivalent to his active income. Yes, that’s right, he earn rental income from his properties and dividend income from his stocks. But he has to pay his mortgage, how is it possible?

Mr.Leemubu make sure that whenever he invest in property, his monthly rental collection is higher than his mortgage payment. This is to ensure his income is always a positive flow. Since reinvest his passive income, he managed to use ‘Law of Compounding’ to accelerate his passive income and made his active income and his passive income equivalent. Then, how is it possible his wife to quit her job? Isn’t her income will be still needed to support the family?

The answer is Mr.Leemubu made sure, whenever he buys a property, he’ll take a MRTA insurance coverage. MRTA which stands for Mortgage Reducing Term Assurance is a insurance which is used to settle your mortgage incase some unforeseen circumstances happen, such as death and permanent disability. So, when he got stroke, he’s declared unfit to work due to his disability.

Now, Mr.Leemubu and family have passive income to cover the entire family expenses as well some extra money to invest.

Conclusion

Being debt free doesn’t mean you have achieved financial freedom. The main keyword in financial freedom is ‘passive income’. Only when your passive income could support your life or lifestyle without working or doing any active job, that’s when you can declare yourself, has achieved financial freedom.

I'm debt free... financial freedom!? Part 1 of 2

Mr. Mubulee is a proud man. He’s proud because he believes he has achieved financial freedom. His favourite word phrase is “I achieved financial freedom because I’m debt free”. He has fully paid for his house. His car and his wife’s are also fully paid. He always pays by cash or cheque. He has 2 children, Stevie, studying medicine in Ukraine and the other, Ronie studying engineering in US.

Mr. Mubulee and his wife, Elika bring in a total income of $20,000 per month. Mr. Mubulee started to save at young age, almost 20% of his salary. The current house he’s staying is worth $200,000 at the time he bought it. He bought his house cash. Same goes for his cars; he paid cash. Since they don’t have any debts, they started to live quite lavish life. They don’t really save much money now days as their income is just enough to pay their living and children’s college fee.

Mr. Mubulee is a proud man. He proudly claimed himself to has achieved financial freedom.

One fine day, Elika received a phone call from Mr.Mubulee’s office. She was shocked. She was informed that Mr.Mubulee collapsed in the office during a meeting. She rushed to the hospital and found out that her husband had a stroke. Luckily, he was admitted on time, or else it would have been a danger to his life. Mr.Mubulee looks so helpless.

They were worried, confused. Mr. Mubulee discharged from hospital, but he’s paralyzed. He’s not fit to work. His company had to release him from his job. Mr.Mubulee’s income has stopped. So, the only breadwinner is his wife, Elika. Her income is only $7,000. Since Mr. Mubulee is bedridden, they need someone to take care of him. If Elika quit her job to take care of him, there won’t be any income. They get a maid to take care of him.

Elika started to feel the pressure. Now, she has to pay for everything; their household expenses, their children’s college expenses, transportation expenses and their latest expenses, Mr.Mubulee’s medication and maid services. She started to use her credit card and live with debt.

As months pass by, she couldn’t handle the financial situation. Mr.Mubulee felt helpless, he couldn’t do anything to help his wife. Stevie and Ronie, their children has been barred from attending their courses as their fee has been due for months. Elika had to sell off their car to support Stevie’s and Ronie’s education, and bought a cheap secondhand car.

Elika’s credit card debt started to pile up. Now, the bank is going after her. She has only one choice, to sell their only home sweet home. Mr.Mubulee has to agree with Erica’s decision. So, they put the house for sale at market price of $300,000. Unfortunately, the property market isn’t doing so well. It has been 2 months and there were still no buyer, and the banks are chasing her. Their children also started ask for more money for their education.

They have no choice but to sell their house for $220,000 below the market value of $300,000. She had to use the money to settle her credit card bills and send some money to her children. Mr.Mubulee and Elika have to move to a rented house. The economy started to get worse. Erika’s company had to deploy pay cut. Now, she’s panic as she can’t afford the maid service, and her credit card bill start to pile up again. Their struggle continues as time pass by.

Mr. Mubulee’s proud has totally vanished into thin air. What he was proud of being financially free now is just a myth. What was the mistake he did? Isn’t being debt free means you have achieved financial freedom? To answer that, tomorrow we’ll look into the story of Mr.Leebumu, who has different idea of financial freedom.

(Click here for Part 2)