Save and insure for security, avoid unnecessary debt

You may say, "Well, I have heard it enough." Since young, we were taught to save money and not to splurge on extravagance. So why do we need to save?

Think about it this way, we work half a lifetime only to be paying others all the time. Why not switch that equation around and pay yourself first? But what does that mean?

The first thing I do when I received my pay cheque every month is to pay myself first. By that, I mean setting aside the money in my savings account before I start spending. I have 2 separate savings accounts for different functions - one is for rainy days and the other to build wealth.

So the first objective of saving is to save for rainy days

We should save for rainy days. Experts advise saving 3 to 6 months equivalent of your expenses of liquid reserve as emergency fund. To exemplify this, if you spend $1500 a month, you should have $4500 to $9000 of liquid cash in an untouchable account for emergencies.

Things do happen and will happen. Businesses do fail, companies do lay people off, your wife can get pregnant, people do fall sick, get hurt or die. If you were to look back, I am sure you can name an incident at some point in your life, which happened without warning.

The question is, under what circumstances should you then draw from the emergency fund? As the word suggest, it should be for emergencies only. You should not be touching it for your holidays, neither should you be using it to finance a new car. Hospitalization, unemployment are more resounding situations to utilize this fund.

But what if a misfortune occurs and your emergency fund or all your savings are not sufficient to cover your and your dependents' long term financial needs? That is where the insurance kicks in. The main objective of taking up insurance is to create a safety net to preserve your dependent's and your lifestyle, dreams and aspirations in the event of death, disability or illness. It prevents a large part of your wealth being taken away while you are still building it.

The investment portion of an insurance policy should be considered optional. You have the choice of taking up just pure insurance protection policy, omitting the investment option, and hence paying lesser premium monthly/yearly. You have the choice of putting your money somewhere else for investment.

The second objective to saving is to avoid unnecessary debt

We should also save to avoid debt. Here is an example of what we meant by saving to avoid debt - the idea is saving a certain monthly amount with interest in order to have the amount needed to make your purchases. The concept is simple. If you are going to buy a consumer product, instead of paying it by installment and paying interest to your debtor or bank, save money every month with interest until you have enough to buy the item.

Lastly, save to build wealth

Even Warren Buffet, one of the world's richest men started off with a substantial wealth to multiply his assets. If he were to start off with anything much lesser than what he had, it might not have brought him where he is today. The first step really to the amassing of wealth is thus as boring as, Save vigorously!

We do not only save for emergencies, you should save to escalate your money. Let your money work for you. The more time you have to let your investments grow, the bigger the fortune you'll end up with. That is where you could exploit compound interest in your favour. What is so magical about compound interest and how can you make it work for you? For details see Grow$ section.