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When I received my first pay in a proper office day job, I realised how unprepared I was in managing my own finances.

Until we both started working and earning a decent wage, we were living a very modest lifestyle and watching every cent we spend because we had to make do with whatever we earned. As a couple living in Sydney (one of the most costliest cities in the World) at that time, whatever we earned was enough to live on while saving max. 2% of our income as savings for a rainy day. Again, 2% of meagre income as savings does not amount to much but something was better than nothing. Managing finances is quite straightforward when you are on meagre income. Do not overspend, spend on necessities, etc. Basically try to reduce your living expenses and if anything left at the end of it shove it into savings account.

Then one day, I got a full-time proper job. We had to move cities for me to take up the new job and we did. Within couple of months, my partner found herself a job in the new city. Suddenly, we saw our income swell and we had no idea how to manage finances!

I started reading blogs, trawling through internet forums, without judging I read various articles on the internet ranging from “get a mortgage” to “invest in mutual funds” to “trade binary options”. I knew I had mastered the art and knowledge of investing. I was now ready to invest and become rich!

When I sat back and gave it thought, I realised I might be jumping the gun because I still had not figured out how to manage our income. So, I went to Lord Google with the sole aim to unearth information regarding how do I manage our regular income. There were a few schools of thought but most agreed on one theme:

“Set aside your savings before you spend on living expenses”

But how much should I set aside? That depended on how much do you need for living expenses. It was like chicken – egg problem. Living expenses consists of housing, utilities/necessities, food and entertainment. Trawling through Google, I noticed that there was one common theme. The key point I learnt was

“World wide, someone who spends more than 30% of their income on housing is considered to be under stress.”

Income is nett (i.e. after tax or income in-hand). So, now I had a baseline. Housing is usually the biggest expense. Assuming our living expenses is as high as the housing expense and accounting 10% for miscellaneous expenses, we should be spending no more than 70% (30% towards housing + 30% towards living +10% misc) of our income. Thus we arrive at a rough estimate of 30% of your income must go towards saving. And thus I set ourselves some rules to abide by:

  1. Do not spend more than 30% of our nett income on housing. Lower the better.
  2. Always save minimum 30% of our nett income. Higher the better.

I am quite to proud to say that we have stuck to this rule even though it has been 8 years since we first set up these rules.

Rules such as mine are not hard and fast, but many agree that spending more than 30% of nett income on housing is not sustainable and most likely considered not living within your means. By sustainable, they mean that you will not be able to save.

Following these rules, within four months we saw our cash account growing fatter. Slowly and steadily we started building a diversified portfolio (shares/ETFs, bonds, physical metals, etc).

Following these set of rules absolutely works in building up your cash buffers and investment portfolio. There is no magic pill, and brick by brick is how you build a portfolio; especially true for someone like us who are entirely reliant on our own incomes (without inheritance or parental backstop) to build wealth.

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