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The monthly savings bucket is the first aspect that the newly salaried individual should know about. The Power of Three system helps this newbie build a cadence/rhythm of saving money from their fixed source of income.
FIRST THINGS FIRST
It is essential, for any individual who practices the Power of Three system, to do this as the first step. This is the most consequential step for the person’s financial freedom in the long term. The single biggest factor here is to start a regular rhythm of saving as soon as the money comes in. As mentioned in the introduction to the system, this is the first one-third of the total income for any given month. If the investor finds it difficult to meet ends after investing this particular amount, they can choose to reduce it for some time, not for longer than a year though. I mention this as a hard limit, because, not being able to meet one’s expenses is a sign of mismatch between one’s lifestyle and earning. This can only be corrected by bringing fixed expenses below a third of monthly income or by increasing monthly income (skill upgrade, promotion, job change etc.) to achieve the same result. The fact that managing the source of income in this manner is quite important for the individual’s financial health will be very clear once the reader has gone through all 3 parts of the Power of Three system.
How do i get this done?
I’d really recommend doing it the conservative way at the beginning – use savings accounts, Fixed Deposits (FDs), Recurring Deposits (RDs) etc. Using these gives the new investor a sense of confidence while getting him started on his investment journey.
My personal favorite beginner technique is, using a “Auto-Sweep In” account in conjunction with a savings bank account to which one has made the withdrawal process a little difficult, like not holding the debit card or PIN for withdrawal for example. it’s a bit like tricking oneself to not dip into the savings when temptation strikes. This allows one to lock in an amount of cash for a higher rate of interest while still retaining liquidity or the freedom of withdrawing the cash within a short interval without the risk of penalties. This mechanism is the equivalent of issuing a standing instruction to the bank that whenever the balance of your savings account exceeds a certain sum, the money in excess of that sum is “swept-in” to another account which offers a higher rate of interest when that “sweep in account” is kept undisturbed for more than a year.
My Personal favorite for beginners, is to use a “Sweep In” account in conjunction with A savings account. This saves the investor’s money At a higher Rate Of Interest along with liquidity.
So, what Next?
There are multiple avenues in which one can invest in a very safe and systematic manner. They would want to maintain a good mix of conservative and aggressive investment tools to sustain a steady growth of the nest egg. While I’ll delve into many of these tools in several other posts, the main point is that the money which will go into those instruments will only be from this bucket and the investor would already be in a position to commit to investing in them.
Once a significant amount is established via the conservative method, the investor will soon realize that this is not a sustainable end as it will increase their tax liabilities and growth of the amount may not match the performance of other investment instruments. It is at this point that the investor will have to look at diversifying their savings each month and since they now have grown a habit of saving cash, it’ll be more of an issue of where to invest rather than how to invest.