Savings, another dreaded word when it comes to finance…. Who wants to save? What fun is that? Most people fall into 1 of 2 categories, either money is tight and they live pay check to pay check and don’t think you can afford to save anything. Or, they don’t see why it’s important and would rather spend the money today so they can enjoy it.
I read an blog recently by a young millennial that felt that there was no need to save at this point. He had watched his parents work hard all their life only to retire and be too sick to travel as they had always wanted. He felt his parents had wasted the best parts of their lives working. He was determined to spend everything he had to enjoy the day. But I think he missed the point, they were working so hard to provide for what was important to them, namely him and his siblings. I would also challenge him about whether he really was happy.
Does it make you happy to live pay cheque to pay cheque, always with a little stress building up around money. Does spending every weekend eating out really bring you lasting happiness? Is your lifestyle really giving you what you want in life and does it align with your values? I’m here to say we need to change the conversation. I’m not saying every young person needs to start planning their retirement, but every person, no matter their age should be saving. The focus of what you are saving for might change at different ages, but the principle of saving is the same.
Saving money is probably the single most important habit you will ever develop in life.
I know, pretty bold statement, but let me back it up. Whether you like it or not, we live in a world that revolves around money. No one can survive in the modern world without it. Do you know what your single greatest asset is? It’s not your home or your looks…. it’s your ability to earn an income. Whether its food, shelter, clothing or a new car, it all takes money.
The one sure way to have more money tomorrow then you had today, is to save some and have it grow. Albert Einstein is often quoted as saying (incorrectly by the way) that compound interest is the most powerful force in the universe. And while I’m not sure that is exactly true, having your money work for you is much easier than having to work for your money.
So what are you saving for?
We all want something in life, even if we have all the material possessions we need or want, at some point I’m sure you no longer will want to work to support yourself. How stress free would it be to work because you
want to or you enjoy what you do? Not just to pay the bills and put food on the table.
I think the way most of us manage our finances is very backwards. We get our pay checks and from that we pay our VISA and our mortgage/rent, we pay our insurance and all of our fixed expenses and then we spend whatever we have left on consumption. Nowhere in this do we pay ourselves for all the hard work we do. Why don’t we pay ourselves first? Do we not think we are worth it?
I know, this is a lofty ideal and you are probably saying; “how can I, I mean I have all this debt to pay? Once everything is paid there is nothing left, I just can’t afford to save.” So where do you start? How much should you save? How can you make this happen?
There is a simple answer for this, you need to be saving 10% of what you make, period.
I know this is a big number but think about this for a moment. Think back 5 or 10 years ago, how much were you making per year? I’m going to bet it was less then you are now, probably more than 10% less and you survived. What happened? It’s amazing how fast “life” can grow into your new income level and no matter how much more you make, you still live week to week, pay cheque to pay cheque.
The best story I have ever heard about how to start saving was written in “The Compound Effect” by Darren Hardy. He tells a story of an assistant he had that came to him and said she wanted to be wealthy but didn’t know how and couldn’t afford to save anything because she was just getting by. He told her the same thing, she needed to be saving 10% of what she earned and then he told her how to get there. And this is the strategy he told her.
For most people, you can’t just take a huge chunk of your pay and park it away immediately.
So don’t try, what you need to do is break it down. You can’t save 10% of your income but could you save 1%? Let’s say you make $50,000 per year, 1% is $500 per year which is just over $40 per month. Can you save $40 next month? I bet you could manage to put that away right now. So take $40 and put it into a separate savings account and then next month, if you get paid bi-weekly, setup an automatic transfer on pay day for $20. Simple right?
Next month, what you need to do is think of a way to save another 1%, how can you save $40 from your normal expenses. Maybe instead of grabbing a coffee at the coffee shop by your office, you can bring a coffee maker to work and buy some beans, maybe instead of eating out with your special someone on the weekend’s you could make a dinner at home for a date night?
As you get to the third month and have figured out a way to save that 1%, increase your automatic transfer to $40. And then start again for the 4th month. Make this a challenge, one good tip is to keep a small note pad with you and write down everything you spend money on in a day, after a few weeks you will likely be saving even more because you don’t want to pull out the notepad to write an expense down.
Start every month with a new challenge, where can you find 1%? At the end of the year, when you have achieved your challenges you will have $3000 put aside and you will have built yourself a habit for life! And guess what, you’re saving 10% of what you make! By the end of 2 years you will have saved $8280 all by starting with just 1%!
Now go and make this happen! Your future self will thank you.