As a follow-up to my last piece on reaching 100K before 30, I thought I should detail some steps on how to get there. Jonathon Kwok, Straits Times reporter, has a follow-up to his piece that shows how one could possibly reach the 100K before 30 by keeping to the $35/day budget. I applaud the guy’s determination in keeping track of where every cent went. I tried to do the same thing once but I gave up after a couple of days. Trying to keep track of how I spent every single cent is downright tiring. And not to mention that it would be unproductive if one didn’t use that data later to see where you could cut down on expenses.

I have a better method.

1) Make sure you have a regular source of income.

This could take the form of a full/part-time job or for those with a regular allowance, that will do fine as well.

2) Make sure you set up separate accounts.

The transactions account would be where your regular income flows into, pay your bills and all the other day-to-day transactions gets drawn down from. The other account should be used as a investments account. This account should be used to only store savings till you find an opportunity. The cost of the investment then gets drawn down from that account.

Of course your money sitting in a savings account represents an opportunity cost- you could invest that money and earn a rate of return that would be satisfactory. However, investing is a lot like fishing; you will require a lot of patience as valuations for asset classes can be bid up to irrational levels by investors. In order to reduce that opportunity cost, you could use a website like imoney.sg to compare the interest rate on savings accounts so that you get the best deal. imoney.sg also helps you compare the minimum you need in an account before fees are charged so be aware of those.

Now, this is the important bit. To ensure that you hit your financial goals, set up an order that automatically deducts a portion of your regular income to your investments account. It is extremely important that you automate this process. Automating the process takes away a lot of the inertia and effort needed to save. This is a little bit of behavioural economics at work- it’s just like how more people will end up on an organ donor program if the program is opt-out as opposed to opt-in.

You may run into cashflow problems at the beginning (such as when the amount for bills is more than the amount left in your transactions account) so I suggest starting with an amount small enough that it won’t hurt. For e.g. if your bills (regular bills such as telco subscriptions and credit card) come up to an average of 500 bucks  each month and your regular income is something like 1000 bucks, then make sure that only something like 200 bucks gets sent into your investments account each month. Don’t worry, you can always increase that amount once you get more comfortable with the process.

3) Rinse, repeat and adjust as required.

Along the way, two things are bound to happen- an unexpected windfall or an increase in regular income. It’s subjective but personally, I would allocate unexpected windfalls into the investment account. Any increases in regular income will similarly cause an increase in the amount that gets proportioned to the investments account.

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