Last week we got started talking about money and how we think about it, so that we don’t always have to be thinking about it. In money, as in many other areas, when we get good at the basic, non-rocket science steps, we find ourselves well on our way to success. Specifically, the most power-packed 20% of financial management strategies will get us about 80% of the results that we are looking for, which, for many of us, may be enough. As promised, today we’ll start looking at what those strategies and principles are that, when mastered, will be enough for most of us to get a long way towards our goals.
Let me start with what I consider the most basic and important habit that really makes or breaks our long term success with money
prepare yourself for an innovative, insider strategy for revolutionizing your finances…wait for it…wait for it…
SAVINGS. Not just savings; regular, consistent savings. Saving on a regular basis is the best litmus test I know of for how our day to day money management is going. Regular savings means that I am spending less than I am making – consistently. Even a small amount of regular savings really adds up quickly.
In my classes that I teach, I always do an activity where we talk about needs and wants and distinguishing between the two (to settle it once and for all, cable or dish TV is NOT a need…”but, my kids…”…nope, not buying it). The purpose of the activity is not to say that we need to eliminate want spending. It’s great when we are in a position to spend on wants. The purpose is to make sure that we’re covering the needs before spending on wants. I have yet to have a person disagree with me when I propose that savings is a need. This makes things real simple…I don’t have money to spend on my wants until I’ve put some away in savings.
Repeat after me: savings is the key to getting ahead.
Is increasing income the key to getting ahead? No. Savings is.
Is an inheritance or winning the lottery the key to getting ahead? No. Savings is.
Most people who make more money than I do don’t save. Instead they bump up their lifestyle and enjoy spending more. Even better, they leverage the higher income for more debt. I get a raise? That’s fantastic! I’ll use it to make my family greater slaves to debt! That way, if I lose my job, we can really go out with a bang!
We should take a hint from our ancestors. When the harvest comes, a lot of it better go in the barn. Eventually the winter will come.
Regular savings develops so much more than a nest egg for us. It develops consistency and discipline in us. Wow, I’ve never seen that much in my account before…(nervous fidgeting)…that’s it, we’re going to Cancun…oh, all right, I’ll keep building an emergency fund. It teaches us to constantly prioritize and let our impulses know who’s steering this ship.
There are two ways of purchasing things: saved money or future money. Future money is more expensive and less secure. It comes with an interest rate (money I pay to use someone else’s money) and the risk that something will come up that prevents me to follow through, leaving me with a repossession, a judgment, or a guy named Slick and his sidekick Barry knocking at my door. Slick doesn’t like not getting paid and he refers to himself in the third person. My recommendation is that you not correct him on this grammatical error.
When you have a big purchase on your horizon, pay yourself in a disciplined manner and buy the item up front (I do make an exception for a house). Zero chance of repossession and no money paid for the use of someone else’s money. Even more tangible: no debt burden. Debts weigh on the human psyche in a way that we shouldn’t underestimate. Go to Hulu and type in “don’t buy stuff” for a great refresher on this whole concept (tip:choose the Saturday Night Live skit).
Practically speaking, if you financed your last vehicle, as soon as you pay it off, begin paying yourself what you were paying your lender. But I’m driving a 7 year old car. Look me and my friend ’96 Saturn SL 1 hard in the eye. Nope, no pity. Save up, and then replace your car. Use all the extra money that you aren’t paying in interest to shop online at a certain vintage kid’s market (don’t think too hard…I’m talking about the Cheeky Bums Kid’s Market). 🙂
Saving money puts you back on the front side of things. You save, and then you buy. For real financial success (again, we define this as a position where we don’t always have to be thinking about money), this is not optional – it’s a necessity and needs to take priority over my current want expenditures. Cancun will still be there in a few years. In a couple of years I’ve heard that iPads will actually cook your meals for you – might as well wait for that.
Experience the difference that regular savings make. Unless you are in the middle of a crisis, (which is what the saved money is for), there has to be room for savings. Start small. Just establishing the habit is half the battle. The numbers will come. Take a small amount out of your check and put it in a savings account before you have a chance to spend it. The IRS figured out long ago that this is the only way that money’s going to get set aside.
I’ve never heard someone lament making savings a priority and sacrificing wants in order to do it. In finances, as in physical fitness no pain, no gain applies. The sooner we embrace this, the better. A little pain now saves a lot later.
Can you commit to saving even a little bit on a consistent basis? Be sure to come back next week for more of the essentials!