We live in the richest country in the world, but many Americans are just living "month to month." They have trouble paying their rent or mortgage, their car lease payments and their credit card bills. Others may have a nagging feeling that they should be saving more money.
In our crazy, consumer-driven society, why are some people able to hang onto their money? In the last few years, Americans have collectively spent more than they earned after taxes. This means that their out-go is greater than their in-come. If they try to solve this problem only by focusing on earning more money—and do not control where they spend it—they will find themselves "running in circles."
Saving money is even better than making money—and a lot easier. That is because you do not have to go out and earn it—you just keep it!
They say that the quickest way to double your money is to fold it in half and put it back in your pocket. But seriously, saving increases your money!
Slow and steady saving wins the race. The turtle will outrun the hare if the turtle perseveres. Small savings over time are more likely to create wealth than taking big risks. Use the magic of compounding interest to help you. If you keep time on your side, you can create substantial wealth.
Here is an example: If you start by saving just 1% of your income and you bring home (net) $2,000 per month, you would save $20 per month. Doesn't sound like a lot, right? Here is the good news: If you saved $20 per month for 20 years at an annual rate of 10%, you will have saved about $14,000. At the end of 40 years, you would have saved about $112,000!
Many people don't think about it when they buy something small but overpriced, like a $5 cappuccino. Take a close look at the small treats you buy for yourself. If you gave up just one $5 treat each week, you would have your $20 per month to invest and $14,000 more to invest probably well before you are ready to retire.
Small amounts grow to large ones over time if properly invested. It is not too late to start saving. Of course, the earlier you start the better, as it is much easier to save when you are young and do not have as many commitments and obligations. No matter where you are in life, you can start now to save and reach your savings goals.
If your income is $1,000 a month and you need only $900 per month, you will be happy that you have $100 left over to invest or spend as you wish. You have avoided debt and managed your income responsibly. On the other hand, if your income is $1,000 and you need $1,100 per month, you will be unhappy because you don't have anything left over. You will continue to fall more and more behind. As Charles Dickens wrote in David Copperfield more than one hundred fifty years ago, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
In other words, if you spend less than you receive, you are more likely to be happy. However, if you spend more than you have, you will be unhappy, because overspending puts you into debt. As someone once said, "If your outgo exceeds your income, then your upkeep will be your downfall." So learn to be thrifty.
Perhaps your parents or teachers told you to "save for a rainy day" and "pinch your pennies." That's being thrifty! To be thrifty is to be economical, spend wisely and save your money.
Thriftiness is not just for average people. Some billionaires are thrifty. For example, Jim Walton, of Wal-Mart, worth $18 billion, drives a 1999 Chevy pickup. Warren Buffett, worth $57 billion, lives in the same house he bought for $31,500 almost fifty years ago.
Some people spend much of their free time thinking about shopping and how to spend money. Sometimes they think they are "saving" when they shop. Unfortunately, most of the time they are just spending.
Other people devote their spare time improving lives, instead of spending money. They visualize how good their life will be when they are finally financially independent. They have learned the game of not spending their money—and enjoy it. They learned to be the winner of the savings game, and you can, too!
Samuel K. Freshman and Heidi Clingen are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com.
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Plan for Financial Speed Bumps on the Road of Life
Our best advice to anyone in any situation is always the same. On one hand, It is easy enough for Heidi’s sons to understand when they were young. On the other hand, it has sophisticated enough to make sense for heads of state. Obviously, we think it is good advice.
It goes like this: Expect the best, but plan for the worst.
As the saying goes, life can come at you fast. Murphy's Law says, "Anything that can possibly go wrong—will!" Sam likes to joke that despite Murphy’s paranoid attitude, he actually was “an optimist.”
When you think about it, job loss, divorce, illness, disability, and accidents quickly can torpedo your finances. The buffer, the moat, is sufficient spare funds set aside for emergencies. What you need is a funding buffer, a savings account that protects you like the bumper on your car.
Do not make assumptions:
Some of you have wealthy parents or family members. You may believe that you will receive an inheritance eventually.
Unfortunately, "your" money may not reach you if it runs into a roadblock. For example, your inheritance may be only hinted at, implied, or assumed. You could have a "falling out" with a family member. Your parents could remarry and/or live much longer than expected. The money that you were expecting for an inheritance maybe used to pay for your parents’ long-term medical care needs, to pay for estate taxes, or to recover from financial downturns.
Do you know specifically when the inheritance will arrive? Do you know how much might be? In any case, prepare for possible disappointment. Never count on an inheritance. Above all, do not spend it before you get it. (This is a good motto for all expectations.)
Windfalls such as inheritances are not for spending. They are a boost on your quest for financial independence and for creative capital to invest.
"Put your own oxygen mask on first"
You must take care of yourself first, before you can help others. Think about it. You cannot help others if you are in trouble yourself. Just like on an airplane, flight attendants remind us all to, "put your own oxygen mask on first." This well-known phrase is a good way to remember this principle.
Keep your money safe. You can help protect others with it later, after you have reached your financial goals.
Reduce money stress
Here are some things you may do that can get you stressed about money:
· Listening to media hype and deceptive advertising
· Signing up for too many credit cards, debit cards and lines of credit
· Running up the balances on your credit
· Consolidating your debt with a disreputable credit counselor
· Buying a more expensive car, stereo system, wardrobe, etc., than you need
· Buying a larger home than you can afford
**Money stress can force you to make quick choices that you regret later. Usually, decisions made under stress are not good decisions.
Be happy with fewer things
When you see something you like, ask yourself, "Just because I like it, does that mean that I need to own it?"
If you do not need it, do not buy it. A life of simplicity and freedom from endless material wants can be liberating. An added bonus is that you have simplified your finances and freed up more of your money to invest in things of lasting value.
Develop the habit of saving
Your savings can start small, but the rewards of saving are infinite. Find the inner motivation, the genuine desire to change your life for the better. Energize your commitment by visualizing the improved life that you will have.
Einstein defined insanity as "doing the same thing over and over again and expecting different results." So start doing something different—and learn to hang onto your money!
(Written by Samuel K. Freshman and Heidi Clingen, authors of TheSmartestWay™ to Succeed Series and TheSmartestWay™ to Save—Why You Can’t Hang on to Money and What to Do About It.)
(Written by Samuel K. Freshman and Heidi Clingen, authors of TheSmartestWay™ to Succeed Series and TheSmartestWay™ to Save—Why You Can’t Hang on to Money and What to Do About It.)
