Tuesday, 4th November 2008

The practical way to riches, part 2

Written by George Traganidas Topics: Habits, Personal Finance

Last week, we talked about the first habit on the practical way to riches. The first habit is to put aside some money each month so you can invest it and make the money work for you.

The second habit is as important as the first one. The first one will help you to expand your wealth and start to earn more. What we must pay attention to is that the wealth that we build is built on a strong foundation. The second habit will help to prevent a bad event of destroying our progress.

Habit 2 – Save money

One thing that you must be sure about is that your way will not always be easy. We need to plan for these times and not be surprised when they come. We need to save money every month in case of emergency. The last thing you like to happen is to need money urgently and not have the cash around. This would cause you to either use your investment fund or liquidate some of your assets. Neither of them is a good idea. So we need to plan ahead.

There is no set amount that you should save every month. It all depends on your appetite of risk, if you have a family, what expenses you have, etc. Therefore, I can not give you a magic number. What a lot of people recommend is to save 3-12 months of expenses. You need to know how much money you need each month on average and then plan.

The next question that many people ask is where they should put this money. My grandfather used to keep them under the mattress. Even though that might be a good idea with the current credit crisis, it is not the best one in general. A good place to put them is in a savings account that you can access with minimal notice. You can even split and put some in an account that you can access instantly and some in a higher interest account that you can access with a few days notice. The important thing to remember here is that you are not looking to invest this money. You are looking to put it in a place for quick access.

You must be careful of inflation for the money that you save. It must grow at a rate that is bigger than inflation or else you will be losing money every year. You will also need to review this amount of money once in a while. If your circumstances change you might want to save more or less money.

Next week I will tell you the third habit.

Follow the practical way,

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