How to Save a Little Fortune 

How to Save a Little Fortune

Illustrated and written by

Yow Chuan

© 2010 www.meshio.com
 How to Save a Little Fortune 

How often have you heard of the phrase “Pay Yourself First”? It has been
written in so many personal finance books and preached by so many financial
planners out there that the act of “paying yourself first” is no longer a secret.

If it’s no longer a secret, why is it still so hard to save a single sen after getting
your monthly paycheck?

That, my friend, I cannot answer for you, as everyone’s situation is very unique.
Here are a few possible reasons why you are not able to pay yourself first:

(i) You are spending more than you earn.

(ii) You did not automate the process of paying yourself first. David Bach has
written a convincing book- The Automatic Millionaire, on why you must
automate the process of accumulating wealth.

(iii) Leeching friends who likes to borrow money from you. Trust me; it’s a bad
idea to borrow money to your friends. Refer them to a friend who works in a
bank’s personal loan department. You will thank me for this advice.

The Percentage Allocation System

I am going to explain in detail why it’s effective and why you should give this
system a shot.

Let’s start with your intention of keeping track of your incoming ringgit and
outgoing ringgit. What’s the whole idea of keeping track of it? Yeah, close your
eyes for a few seconds and ask yourself deep down inside.

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 How to Save a Little Fortune 

If your answer is to ensure that you do

not overspend and hoping that you will
be able to save a portion of that money
to work for you (either as an emergency
fund or for the sheer purpose of seeing
it accumulate), then this might just be
the system meant for you.

Okie, so what do you normally do when

your January paycheck arrives into your savings account? If you are going to
just leave it there and hope that at the end of the month, you will have some
savings to bring forward to the next month, then I can assure you that it’s very
likely not going to happen.

So what are you going to do to prevent the account from drying up?

Here are a few possibilities you can choose from (The following procedures
must be executed, if possible, automatically, once the paycheck is in the
account)

a) if you will be needing the money in case of a sudden emergency

Channel X% of the money using auto-debit/standing instruction to a bank that
you do not have an ATM card, with the least branches around and the one that
will give you the most trouble accessing to, for e.g. Bank of China (so far, I’ve
only know of one branch in Jln Ampang). Preferably a fixed deposit account.

b) you already have about 3 months worth of monthly salary to buffer for
any emergencies in a saving account and might be needing the cashflow in
the next 5-6 months
Setup a conservative mutual fund account where the objective of the fund is
capital-guaranteed or with emphasis on capital preservation, I suggest that
either a fixed income fund or a dividend fund. Transfer X% of your total

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 How to Save a Little Fortune 

paycheck to this mutual fund account. Make sure you also apply for the auto-
debit facility, where the money will be deducted on a monthly basis.

c) if your emergency fund is about 6 months worth of monthly salary and

you do not foresee any cash flow problem in the next 1-2 years
Setup a moderately aggressive to aggressive mutual fund account. Transfer X%
of your total paycheck to this mutual fund account. Also, setup an auto-debit
facility to automate the transaction from your “paycheck account” to this
mutual fund account.

d) you prefer a no-risk saving scheme, where your contribution is very

limited and you are pretty sure you will not withdraw it
Setup a 21-30 years endowment or annuity account where you can contribute
to it on a monthly basis. Decide on X% of your monthly salary. Make sure you
also use an auto-debit facility.

Well, there could be other scenarios worth exploring. You can even open a CDS
account and buy some blue chips stocks, but let’s try to keep things simple for
now. The basic idea is to put your money where it will give you the best
interest rate base on your cash flow liquidity.

I shall explain in detail what X% in the next section.

© 2010 www.meshio.com
 How to Save a Little Fortune 

The X Factor

If you’ve noticed something from the procedures I stated previously, I did not
mention anything on the amount of money you should put in the account.

Herein lays the most crucial figure in the entire system, and one which only
you can decide and determine yourself.

The X% stands for an amount ranging from 1%

or more, where 1% would mean that you are
saving only 1% for your salary. Of course, the
more the better, but for this system to work,
you must specify this X amount and must be
able to hang on to it like your life depended on
it.

To know what is the value of X, you must first calculate how much you are now
spending on an average month (I won’t go through this with you, you should
know better). If you are not even bothered to calculate your own monthly
expenses, then you might as well stop reading here. Just like a company that
doesn’t keep track of its own business account, there’s no way you can know
how healthy the company is.

Okie, let’s say you’ve figure out the average monthly fixed expenses. Subtract
that amount from your monthly salary. For instance,

Your monthly salary figure is RM 3000.00

Your average fixed expenses figure is RM 2763.35

Total remaining: RM 236.65. This figure should be positive, if not, you’ll have
to work on that first :-)

© 2010 www.meshio.com
 How to Save a Little Fortune 

That’s 7.88% of extra ringgit. To be safe, we will lower it down to 5%, since
your expenses figure might vary from month to month, but it shouldn’t vary by
too much.

Now, the X for you will be, from the example above- 5%.

You will now ensure that 5% of your monthly

paycheck goes into one of the “Treasure
Chest” of your choice before you even
withdraw a single sen from your paycheck.
This is a very important procedure that must
not be violated at ALL cost. Consider this the
rule of the game; if you break it, you lost.

Hence, it’s best you automate this job, since

as human beings; we are very easily influenced by mega sales. The more mega
sales around, the more emotional we get.

Once you started off the 5% allocation, consider this as the lowest denominator
of your allocation. Hence, the only way is up. So, you should really consider
very carefully if you can afford to part with the 5%. Even 1% is okie, as long as
it’s positive and you can stick to it.

Here comes the next part of the system. You have to increase the percentage
of your allocation as new situation arises- for example, whenever there’s an
increment of your paycheck or you are getting an alternative stream of stable
income which you don’t need anyway. Your expenses might increase alongside
too, but as long as you have more money remaining at the end of every month,
you must revise the percentage up a few notch.

© 2010 www.meshio.com
 How to Save a Little Fortune 

The higher percentage you can allocate, the faster you will see the magic of
this system. I shall show post up a simulated example of how the magic is
derived in the next section.

Automated Savings Chart

As a continuation from where I left off, here’s the chart on how it would have looked
like if you’d followed the steps mentioned earlier- by allocating an X% of your income
into an untouchable fund.

Income
The Annual Increment To be Rate of Total
Age Magical X Income Ratio Invested Return Return
25 3.0% $ 24,000.00 $ 720.00 10% $ 792.00
26 3.5% $ 24,480.00 $ 856.80 10% $ 1,813.68
27 4.0% $ 24,969.60 $ 998.78 10% $ 3,093.71
102%
28 4.5% $ 25,468.99 $ 1,146.10 10% $ 4,663.80
29 5.0% $ 25,978.37 $ 1,298.92 10% $ 6,558.99
30 5.5% $ 26,497.94 $ 1,457.39 10% $ 8,818.01
31 6.0% $ 27,822.84 $ 1,669.37 10% $ 11,536.12
32 6.5% $ 29,213.98 $ 1,898.91 10% $ 14,778.53
33 7.0% $ 30,674.68 105% $ 2,147.23 10% $ 18,618.33
34 7.5% $ 32,208.41 $ 2,415.63 10% $ 23,137.36
35 8.0% $ 33,818.83 $ 2,705.51 10% $ 28,427.15
36 8.5% $ 35,509.77 $ 3,018.33 10% $ 34,590.03
37 9.0% $ 37,285.26 $ 3,355.67 10% $ 41,740.28
38 9.5% $ 39,149.52 105% $ 3,719.20 10% $ 50,005.43
39 10.0% $ 41,107.00 $ 4,110.70 10% $ 59,527.74
40 10.0% $ 43,162.35 $ 4,316.24 10% $ 70,228.38
41 10.0% $ 45,320.47 $ 4,532.05 10% $ 82,236.47
42 10.0% $ 47,586.49 $ 4,758.65 10% $ 95,694.63
43 10.0% $ 47,586.49 105% $ 4,758.65 10% $110,498.60
44 10.0% $ 49,965.82 $ 4,996.58 10% $127,044.70
45 11.0% $ 52,464.11 $ 5,771.05 10% $146,097.33
46 11.0% $ 57,710.52 $ 6,348.16 10% $167,690.04
47 12.0% $ 63,481.57 $ 7,617.79 10% $192,838.61
48 12.0% $ 69,829.73 110% $ 8,379.57 10% $221,339.99
49 12.0% $ 76,812.70 $ 9,217.52 10% $253,613.27
50 12.0% $ 84,493.97 $ 10,139.28 10% $290,127.80
51 15.0% $ 84,493.97 100% $ 12,674.10 10% $333,082.08

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 How to Save a Little Fortune 

52 15.0% $ 84,493.97 $ 12,674.10 10% $380,331.80

53 15.0% $ 84,493.97 $ 12,674.10 10% $432,306.48
54 15.0% $ 84,493.97 $ 12,674.10 10% $489,478.63
55 15.0% $ 84,493.97 $ 12,674.10 10% $552,368.00

Here’s the story behind the chart…

This individual, let’s call him Mr Boh Ban Huat, started off working at the age
of 25 years old. He earns an annual income of RM 24,000 and he managed to
allocate 3% (RM 720) of that into a fund which gives him 10% return for that
year. In the first year itself, he managed to make an extra RM 72.00 from his
small investment. (This paragraph is contructed entirely from the first line of
the chart).

Ban Huat is a very hardworking chap. His hard work was rewarded in the first
year with a 2% increment and this happened every year until he’s aged 30 (see
figure 1.0). During these years, he has also increased his percentage from the
initial 3% allocation to 5.5%. Since he didn’t touch the money in the fund, the
accumulated interest at 10% has earned him RM 8,818.01 in the fund by the
time he’s 30 years old.

Figure 1.0

Ban Huat continued this habit for many years to come, and when he’s near
retiring at the age of 55, he manages to contribute even more to his fund (up
to 15%) while his annual income stops increasing.

© 2010 www.meshio.com
 How to Save a Little Fortune 

At his retirement party, Ban Huat has managed to saved up to RM 552,368

effortlessly and in fact, he was pretty much surprised at how much this
automated process has bloated his initial savings. See Figure 1.1

Figure 1.1

He then decided to share this spreadsheet with anyone who might be

interested to fiddle with the figures and see the impact of this automated
saving system. You can email him to get a copy.

*****

Okie, that last paragraph was totally made up. However, if you are really
interested to try out and see for yourself how this system can apply to you, just
sent me an email and I shall attach this spreadsheet for your own reference.

In the next section, I shall conclude the benefits of using this system, as
compared to the usual tedious way of documenting every sen you spent daily.

© 2010 www.meshio.com
 How to Save a Little Fortune 

The Better Way to Save

So, after looking at the Salary Percentage Allocation System, hopefully you can
agree with the following benefits that this system offers:-

1) Doesn’t require much of a discipline, since you don’t have to worry about
forgetting to jot down your daily expenses

2) Once setup, you are ready to automate the process entirely to the machine

3) A definite way to really ensure you pay yourself first before you pay others
(how else can you expect to save any money?)

However, this is not a system which will guarantee your success in

accumulating money. In fact, a good system is a flexible one, in which YOU
yourself will be the most important factor in determining how well this system
works.

How is that so?

By monitoring and constantly reviewing if the figures and percentage works for
you from time to time. You should fine tune it regularly to ensure that the
system is not too taxing on your lifestyle and not too lenient that you are only
contributing 1% of your income for the next 10 years.

Time to throw complicated budgeting spreadsheets out of the window?

© 2010 www.meshio.com
 How to Save a Little Fortune 

About the Author

Yow Chuan is an associate member with

the Financial Planning Association of
Malaysia (FPAM).

He is also the author of the Guide to

Smart Insurance Planning which is
available in bookstores nationwide. You
can also order a copy directly here:
http://www.meshio.com/2008/09/the-smart-guide-to-insurance-planning-for-
malaysians/

You can also follow him at his blog at www.meshio.com

© 2010 www.meshio.com