Jagoinvestor

June 23, 2010

World’s Simplest Money Management System – A habit that works for everyone

Most people have such a fear of (lack of) money that they almost equate money to oxygen.  Cover someone’s mouth and nose and watch how they fight you to get their air back.

I came across T. Harv Eker’s book “The Secrets of the Millionaire Mind” it says “Rich people manage their money well. Poor people mismanage their money well”, I read this & my first reaction was, “As a Financial Planner I know that!” Trouble was I didn’t really know the effective system to manage money. I just thought I did.

Money management system

If you want to get rich, focus on making, keeping, investing & managing your money. I had been managing my money for years but not in a systematic way, I paid price for the same (by not following any system). This Money Management System is very simple to understand & implement.

If you want Financial Freedom you got to follow a system for achieving it. As a financial planner people, I meet believe managing money will take away their freedom. They hate the idea of Budgeting. They believe managing money will not allow them to be free and enjoy life to the fullest.

I have been implementing this “Money Management System” for over a year now & it has given me tremendous freedom in the area of money.

Most of the people I meet say, “I will start managing my money when I have enough money”. As a planner, I tell them “if you aren’t managing your money now then you may not have any money to manage in the future”.

Worlds simplest money management system

The Single biggest difference between financial success and failure is how well you manage or mismanage your money. People mismanage money in different ways (By not having a financial coach in life, by not having a financial plan in place, by not organizing their finances, by buying ULIPS, by not taking financial Literacy, etc)

To master money, you must manage money through this effective Money Management System:

  • 50-% Necessities Expense account (Your Day to Day Expenses Account)
  • 20% Financial Freedom Account (FFA Account only for investments. Never spend only invested)
  • 10 % Education Account (Invest in skill development, Personal Development)
  • 10 % Long Term Saving for Spending Account.
  • 5 % Fun & Joy account (balance out the investing for fun % joy(nurture yourself – fine dining, etc)
  • 5 % Give Account (To a lot of people wealth is how much you have. But if you truly want to create wealth, you might want to change that viewpoint. Try thinking of true wealth as how much you give.

– Read about GFactor and Try out JagoInvestor Calculators

A Brief Definition of Financial Freedom

You are financially free when your Passive Income (Income from your investments, rental income, etc) is more than your desired lifestyle).To win the money game, the goal is to earn enough passive income to pay for your desired lifestyle.

One should design its Financial Plan with a context to achieve financial freedom. Having a Money Management System is equally important as having a financial. Always remember The real secret of successful wealth management is that your financial future is truly in your hands.

This one is dedicated to all the readers of JagoInvestor.com, their families & to Financial Freedom.

This article is written by Nandish Desai , who is a financial planner based in Ahmedabad

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Ravi Datt
Ravi Datt
11 years ago

Hi Manish
Article is good. I will implement the same. But I think I read this article very late. I have a query. What is ideal age for these percentages to apply? Mine age is 35 and I think this will change proportion in different accounts. No body was there to guide me on this type of planning. I would like to do for my children and for their future by educating this. Please suggest..

abhi
abhi
13 years ago

I am 23 i have no expenses(literaly 10% of my incomeas expence) at present and if have plan of working next 7 yrs should i invest all of my money in equity i am in market for 3 yrs or so and have decent knowledge of it and i keep in trak of my investment daily

regards,
abhi

Nilesh
Nilesh
13 years ago

its a good article…no doubt but truly speaking it looks incomplete. We would like to know more on this. Things like Education Account, Long Term Saving for Spending Account needs more explanation.

Radhey
Radhey
13 years ago

Interesting read.
I think to make things simple for readers, it could be worthwhile to add to each of the headings, things that one could include in the Indian context. Most of the clarity seems to be coming from comments – like what the Freedom and Long Term Account should include. So for eg, when I read 20% for Freedom account, I was asking myself, where do I invest for it in the first place.
I think a variance on each of these also needs to be mentioned, if I haven’t missed it already. 10% for education could be a bit steep for the investor unless until it includes education for kids as well, that’s where probably I am confused a bit.
But a great article. Good job.

Raju
Raju
13 years ago

You are doing a good job. Keep it up. Have visited your site for the first time. Good article but under what category one should have for personal calamity or marriage/education of children ect. No light on that.

Dhiraj Bahroos
Dhiraj Bahroos
13 years ago

Hey Manish,

Nice one! I have just discovered your website and it has brillant articles! I still have to catch up with most of the writeups, but as much as I have seen so far I appreciate your financial skills.
This article is also wonderfully written! Just to add the little bit I know about the finance world, I once read somewhere that one must invest in diversification, such that 50% is in real estate, 35% in equity, 15% in liquid funds and gold.
I promise to visit this website much more often.
Regards
Dhiraj

Mohan Rao
Mohan Rao
13 years ago

Manish,

“A special report on debt ……Repent at leisure ”

Would like to share this URL in the latest issue of “The Economist”
It is one of the most incisive articles I have read.

http://www.economist.com/node/16397110?story_id=16397110

I look forward to your comments.

Mohan

caribou
caribou
13 years ago

Dear Manish,
Can we include Pension Fund and Life Insurance? How much can I save for these?

Nikhil Shah
Nikhil Shah
13 years ago

Hi Manish

Good Article…Thanks for sharing !

khalid
khalid
13 years ago

Good Post, noted couple of point here. Will try to implement in my Portfolio.
Thanks for sharing

Rahul Kashyap
Rahul Kashyap
13 years ago

Disappointing :(…little clarity and substance !

pavvu_kk
pavvu_kk
13 years ago

Interesting viewpoint Manish! Thanks for sharing!

nandish
nandish
13 years ago

Firstly, I thank Manish for always going an extra mile for Jagoinvestor readers. The Biggest investment anyone can make In you life is giving you time and I guess Manish does that by replying each and every Question with the same passion and care.
A common reply to some of the Questions :
This system can actually get you Financial Freedom. In readers Meet we are creating conversations that can help us achieve financial freedom. Basically three things we all want. We all want Happiness, we want our relationships to be great and we all want to achieve financial freedom.
Statistics show that only 3% people in the world achieve financial freedom. The reason they are not is they are not the readers of jagoinvestor ( and they don’t follow the money management system).
According to me Financial security does not come from the amount of money you currently have, it comes from your ability to get more of it whenever you want. This becomes real when you follow the system with integrity.
Lets look at two-three of in somewhat more detail:
Financial Freedom Account (FFA)- This account is “Sone ke ande dene wali murghi” (Chicken that gives Golden Eggs). Never ever kill this murghi (chicken) no matter what emergency you have in life. This will stay intact if other accounts are managed by integrity. Don’t be an invitation to emergencies (they come due to lack of planning). The idea is to create passive income.
Necessities Expense Account: You all understood this I am sure.

Education Account- This account is to give leverage …………….. Everyone who is in the top 10% today started in the bottom 10%!.Everyone who is doing well today was once doing poorly. Everyone who is at the top of your field was once not even in your field at all. Everybody who is at the front of the buffet line of life started at the back of the line. Now here is the question: How do you get to the front of the buffet line of life, where all the good stuff is waiting for you? The answer is simple. It consists of two key steps: First, get in line! Second, stay in line!. Keep moving. Keep putting one foot in front of the other. Keep developing new skills and acquiring new knowledge each day, each week, each month.

Long Term Saving for Spending Account: It is used for down payments on house or cars… basically through this account you are buying something which will stay with you on long term basis (Expensive ones)

Hope this has made a difference. I am Looking forward to meet Mumbai Readers on 26th June and learn new things from Manish.

Have fun, learn heaps, and may all your success be fun!.
NANDISH

Kavita
Kavita
13 years ago

Manish,

A very nicely written article I congratulate the author for writing it and you for posting it on your site for the benefit of your readers. Most of the financial problems will get solved if we diligently follow this solution.
Thank you.

Kavita

vikas khandelwal
vikas khandelwal
13 years ago

Manish,that’s an nice idea to open separate account for each head.One knows how much he is saving or spending under each head, and if control requires in a particular spending he can take immediate action.Also if someone saves money in necessities exp. a/c or any other exp. a/c, he can transfer that fund to financial freedom a/c or long term savings a/c.

Manish Awasthi
Manish Awasthi
13 years ago

Solid Long term spending for saving is really very impressive 🙂

rohan
rohan
13 years ago

what is finacial freedom ac

Naren Pingle
Naren Pingle
13 years ago

I am wondering, where is the room for SIPs 🙂

Naren Pingle
Naren Pingle
Reply to  Naren Pingle
13 years ago

Sorry, I mean to say EMIs.
Almost everyone takes some kind of loan now a days. And it takes out a chunk amount every month from your income. I think there should have been a place for it also.

Rupali
Rupali
13 years ago

Really good one. I always carrying the same mindset mentioned while investing that i dont have an enough but really thankfull to Nandish Desai and Manish for this. I will have my increment from this month i will really follow this accounts to start my financial plans.

Pankaj Parashar
Pankaj Parashar
13 years ago

Thts a real nice and simple one….i hv a query? should the percentages be calculated after subtracting the liabilities…i mean loans…personal education ..home loans etc….

Pankaj Parashar
Pankaj Parashar
Reply to  Jagoinvestor
13 years ago

Thanks Manish,
well…one more query…should we add PF money and Gratuity (considering if one would be able to avail it) to the take home salary and then calculate long term savings..in turn every amount will be affected i guess..