Tuesday, March 13, 2012

Where to put your Money : 4 baskets

Knowing how to allocate the money you save is the single most
important decision that will lead to your financial goals. You
should take your monthly savings of 15-20% and allocate it to four
money baskets. These are the security basket, growth basket, high
growth basket and the luxury basket. Let me explain each of these.

1. Security Basket (Target Return of 1.5%-4.5%pa)
This first basket is as the name implies, for your security. The
funds in this basket grow just enough to keep pace with inflation.
However, they are there in case of emergencies. If you suddenly
lose your job, experience a salary cut or suffer a setback in your
business, you know that you will have access to these funds anytime
to see you through.

This basket should include cash, fixed deposits/certificates of
deposits, personal housing, insurance & capital guaranteed funds.

2. Growth Basket 1 (Target Return of 8.51%-20%pa)
This is the basket where you build your net worth & positive cash
flow assets that will lead you to financial fre-edom.
This basket is where you put your money into index funds, Exchange
Traded Funds (ETFs) and mutual funds.

You should also divide your funds between the US market and Asian
markets. Although mentioned earlier that Asian equities have
disadvantages, we cannot deny the huge growth opportunities that
Asia offers (especially India and China).

3. Growth Basket 2 (15%-25%)
This is the basket where you ACCELERATE the building of your net
worth & positive cash flow assets that will lead you to financial
fre-edom. Once again, you should not have to touch this money for
five to ten years to let the power of compounding work its magic.

This basket is where you put your money into a winning portfolio of
ten to twelve company stocks. And again, you should hold some Asian
stocks as well as US stocks.

4. Luxury Basket (0%)
Your luxury basket is where you save up to indulge in your dream
assets. This is money that you can afford to spend on things that
are fun like:

Upgrading to a dream house, luxury cars, jewelry, boats and other
luxuries. Again remember from the chapter on 'How the rich manage
their cash flow' that the money to be used for luxuries should not
come from your primary source of income, but from the passive
income generated from your positive cash flow assets.

To Your Success,

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