Here are some further thoughts about how I want to manage my money going forward.
Whenever I get new money (salary or whatever) I will immediately divide it as follows:
- 50% into Account 1 (Asset account) – to buy assets (i.e. spending that will provide monetary ROI)
- 50% into Account 2 (Spending account) – to buy liabilities (i.e. spending that may not provide monetary ROI)
For me it’s useful to actually separate money into these two accounts physically as it helps me solidify how much I actually have to work with.
The point of the Asset Account is to clearly delineate to me that these funds are to be used for making more money —i.e. investment opportunities such as buying shares in companies, rental property, new business development etc —any activity that may cause that initial capital to grow. It takes money to make money so that is why I’m setting this money aside. To me, it makes sense that I should leverage at least half of my income in attempts to increase my income. Some people may use more or less, but half seems about right to me. And for me in particular, I need to immediately separate this money into a different account to gain that extra mental delineation.
The Spending Account on the other hand is for current and future liabilities—things that I need to spend on now (e.g. living costs) and things to spend on in the future (savings for future expenditure).
There may be some grey in what classes as an asset versus liability but my guiding principle is that my assets, when deployed, should bring back more money now or in the future.
For the time being, and because my net worth is so small at the moment, I will consider money being put aside for my house purchase as an asset.