As we talked about last week, money is a tool and resource we can use. So as we go through this month, I want to focus on some simple financial principles you can apply, as well as teach you the underlying philosophies that govern what good people can do and what tremendous accomplishments can be made when we see money for what it is: a tool to improve our lives and the lives of others.
The four pivotal topics we cover this month are:
Getting Out of Debt
Debt is a killer. It is a killer of dreams and hopes. It is a killer of businesses. It is a killer of financial futures. And, according to statistics, debt plays a prominent role in many failed marriages. So what should we conclude from this? If we are to be successful, we must have a commitment to stay out of debt! You can make $2 million a year, but if you spend $2.5 million, it doesn’t matter how much money you made, does it? You will be saddled with debt. We addressed this last week.
One of the key components to long-term wealth building is the discipline of saving money on a regular basis. This week we go through the basics and show how a commitment to saving money can revolutionize your financial life and provide the kind of security you desire. One simple difference between the philosophy of the rich and the poor is that the rich save/invest their money and spend what is left, while the poor spend their money and save/invest what is left. What a simple shift in our thinking for such a revolutionary result. We talk about saving in today’s edition.
Investing is very different from saving. Investing involves risk—calculated risk—and the possibility for much more reward. Saving and investing are done for different reasons and with different desired goals and outcomes. By taking a portion of our income and turning it into capital to be invested, we will be actively working toward our goal of financial independence. We will cover the importance of investing, along with some basics of investing, next week.
Giving a portion of your resources away is one of the most powerful principles you will ever embrace. It seems counterintuitive, but the truth is that giving will help you achieve the financial freedom you desire. Amazingly, giving makes you bigger than you are. The more you pour out, the more life will be able to pour back in. So giving a percentage of your resources away will help you not only have more money, but enjoy it more as well, and that is the best benefit.
This week we will cover saving money. Statistics consistently show the vast majority of people live hand-to-mouth or month-to-month, meaning they have no savings to speak of. The average person would be hard-pressed to live for more than just a couple of months if they were unable to draw an income. This means they are not independent, but dependent upon insurance, government programs, friends, family and the like. The primary goal of savings is to provide a much higher level of personal independence and security.
The discipline of saving directly determines how we will take care of ourselves and plan not only for the future, but also for the unforeseeable events that touch our lives at times. It is an act of self-determination to decide that we will provide for and protect ourselves. Saving is not, as you will see further down, the pursuit of aggressive growth of our resources. Simply put, it is added security, our safety net, if you will, that remains in place to provide a solid base on which to build the rest of our financial independence.
So, with these things in mind, let’s take a deeper look at saving our money.
Saving is an act of discipline. No matter how you slice it, saving money on a regular basis is a discipline. It is not “dependent” on income. If you were to ask five people, all at varying income levels, if it’s hard to save, chances are they would all say yes. This is because our natural tendency is to spend whatever we earn. When we start out making $25,000 a year, we think it is hard to save. If only we could make $40,000 a year! But when we make $40,000 a year, we end up saying the same thing. Typically, when our income goes up, so do our expenses—we buy a bigger house, fancier car, etc. There are people making a million dollars a year who save nothing, and at the end of the year, have spent it all and are no better off than the person making $40,000 a year. Professional athletes and entertainers are notorious for this. Pick up any number of magazines, and you can find a story about an athlete who made $20 million over seven years and is now bankrupt. It isn’t a matter of money; it is a matter discipline. On a regular basis, put a little away until it builds up. That is the savings game.
Saving is much like the familiar story of the tortoise and the hare. Little by little, we put a small amount away, and slowly but surely, we develop the kind of saving amounts we are looking for. Those who put away a lot and then spend it all on a big-screen TV may end up with a TV, but that is about it. In the end, the slow and steady saver ends up with real wealth and financial independence.
Saving builds self-reliance. Our ultimate financial goal should be to become independent and have no need to rely on anyone else. Ideally, we should be able to pay our bills and live off of the interest of the savings and investments we have for the long term. So through our diligent saving, we rely on what we have accrued. Then we become more capable of helping those in need. We are now the lender and not the borrower. Saving allows us to rely on what we have stored up for ourselves if bad times come along. A good savings goal is to have at least six months of living expenses set aside. For example, if your expenses are $3,000 a month, then you should set the amount of $18,000 as an initial savings goal. This gives you the ability to be self-reliant when you need it and the peace of mind of knowing you would be able to handle challenging circumstances if necessary.
Saving money not only helps bring security and peace of mind, but it also begins to harness the power of compound interest. As we will see next week, investing is the maximizing of capital gain and the harnessing of compound interest. Saving money in a standard savings account or money market account will pay a nominal sum depending upon interest rates. As we will discuss next week, there is something called the “Rule of 72,” which says that whatever interest rate you average, divided into 72, will determine how many years it takes to double your money. So, at 3 percent, your money would double in 24 years. That isn’t extraordinary by any means, but it does happen. Your money is working for you. You get more money simply by letting it sit there and letting compound interest do its work. With saving, while this is a seemingly small beginning, it is the strong foundation of security that allows you to build the future of your dreams and goals, and provides the anchor to help you weather financial storms that can come your way. Stay tuned, because the real excitement comes next week when we talk about the power of investing.
Basically, our understanding of the discipline of saving our money on a regular basis is for the safety and stability it creates. Investing is for advanced compounding of your resources.
So here is what we should focus on:
– Adopt the regular discipline of saving.
– Think like the tortoise and not the hare.
– Achieve self-reliance through saving.
– Harness the power of compound interest.
In the next section, we’ll give you some additional thoughts, ask questions for reflection and give you some action points. View
Until next week, let’s do something remarkable!
Saving money is simply a discipline, much like any other discipline. If you want to lose weight, you exercise a little each day. If you want to build wealth and independence, you save a little each month. There is no magic formula, there is no Land of Oz, there are no silver bullets and there is no genie in a bottle.
Saving will come the same way all good things do: through a plan, hard work and discipline.
With that understanding, here are five steps for savings success:
Do it regularly. Every week, every two weeks, every month—it doesn’t matter. All that matters is that it is a consistent practice.
Pay yourself first. One key principle many people promote is paying yourself first. This is sound advice. The taxman doesn’t get it, the credit card company doesn’t get it—you do. That is the way to do it. When you get your paycheck, write yourself a check or transfer it into your savings and put it away. Many people suggest—and I think it is a good idea—to put at least 10 percent away in savings. This should be our goal.
Set a goal of saving enough to cover six months’ worth of expenses. Or, better yet, six months’ salary. As I mentioned above, this is a good standard, no matter your salary. Unforeseen things can happen to even the best of us, and we are smart to be prepared.
Don’t touch it. Do not touch your savings. Set it aside and let it be. Consider it gone except in the case of extreme emergency or opportunity.
Invest after. Once you have your savings established, then, and only then, move on to investing. Investing is the second act of financial independence. Saving comes first for security and safety, and then you move on to investing and placing your capital at risk.
There is obviously a lot to be said about basic financial soundness, but what we’ve discussed is a simple way to begin saving and developing financial independence.
Be sure to download this week’s workbook pages to complete the Questions for Reflection and Action Points exercises. View