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Savings is Sexy

Everyone reading this blog wants to make more money, but once you get it, do you know what to do with it? Let’s face it, most people don’t have any savings and if they do, it’s maybe a few thousand dollars. That’s not necessarily because they can’t save, or because they don’t earn a decent income, but rather it has more to do with the psychology of savings. Saving money is tough, but most people’s beliefs get in their way of saving money and make it nearly impossible.

Life doesn’t come with an instruction manual. It really should. How to manage money is not a skill that we’re born with, and there really isn’t one good guide out there that tells us how we should be approaching money, savings, etc. As a result, most people have many bad habits when it comes to savings, along with many misconceptions about what saving money really means.

To most people, savings = retirement. It’s money that you put aside now, earmarked to be used only when you’re 70 and decrepit. How much does that suck? It’s so much more fun to go buy a Plasma TV today than to save $2500 for 30, 40, 50 years from now. If savings=retirement for you, and that’s why you’re having trouble saving money, read on.

Savings = Safety Net, Backup Plan

To me, having a savings means that I won’t be homeless if I can’t work. Have you thought about your backup plan if your income stops coming in for whatever reason? Most people don’t think about that until it’s too late. We’re a culture of being reactive rather than being proactive because being proactive gives people a big dose of reality that they don’t want to face. But dealing with reality now and being proactive will save you so much grief later on. Believe me, just the mere fact that you have money saved will lower your stress and anxiety levels by so much, you’ll sleep better, you’ll have a much more positive outlook on life in general. That peace of mind alone is worth it.

Savings = Choice and Freedom

The more money you have saved, the more freedom and choice you will have in terms of: what you work on or what job you take, where you go on trips, what car you drive, what house you own, where your kids go to school, whether you cook tonight or dine out. People who don’t have money saved don’t have those choices. They go to the same Howard Johnson hotel at the beach every year, they drive the same car they’ve had for 10 years, their kids go to public school, and they eat at home every night. There’s nothing wrong with any of that, but if you want the choice and freedom to do more, you need to save money. You don’t even have to spend your savings to take advantage of those choices and freedoms. Just having the money saved means that you can take more risks with your disposable income than you could if you had nothing saved.

Savings = Automatic Income, Let it Work For You

This is the biggest advantage to saving money that will not become apparent until you have saved a sizable chunk. For that reason, most people ignore this benefit and choose not to save money.

In general, any amount of money saved will earn 8-12% per year if invested wisely (diversified mutual funds). If you have $5,000 saved, that means your money will make you $500/year for doing nothing. Not enough to quit your day job for sure, which is the mentality that most people have about this. But if you save $500,000, that’s $50,000/year in income for doing nothing, which is enough for most people to stop working or to work only part time (you have to take inflation into account: $50k now may be a lot but it won’t go as far in ten years).

So how hard is it to save $500k?

If you earn $50,000/year pre-tax and invest about 20% of your take-home income, you’ll get there in 20 years. Invest $500/mo in tax deferred investments and $200/mo in taxable investments, you’ll have $504,000 after 20 years:

If you earn more than $50k/year, or if you’re willing to invest more than 20% of your income, then you’ll be able to save more and reach $500k in less than 20 years.

So if you agree that savings is sexy and that it means so much more than having a nice retirement when you’re 70, here’s how to start:

Pay Yourself First

Set aside some % of your income every month as savings. This could be maxing out your 401k if you’re employed (to take advantage of tax deferred growth: and be mindful of how your 401k monies are invested), but I don’t think that’s aggressive enough. When I earned an average income, I would set aside no less than 20% of it into my savings (and today I save a much higher percent than that). I had an automatic transfer setup to do this on the same day of each month. Yes, it reduced my income and my standard of living, but I’m thankful for it now.

Use the 4.5%+ Savings Accounts

Dump the savings account at your local bank and put your money in Emigrant Direct, Countrywide Bank, HSBC. Only a portion of your savings should be here though, you should invest the rest wisely if you really want it to grow.

Invest Wisely

I’ll probably do a separate blog post on this because I had quite a wild ride with investing before I finally became educated and found a reasonable method that works. Bottom line: diversify; don’t put all your money into one stock (like your company’s) or one sector, buy index funds (60% U.S. large cap, 20% U.S. small cap, 20% foreign). If you use a money manager, watch them like a hawk and question everything they say. If they were really all that great at managing money, they’d be running a hedge fund in NY and making millions, or sitting on a beach in Hawaii at their $5M home, not dealing with you.

When you do invest, be sure to make monthly contributions to your investments to take advantage of compounding. Your savings will grow much faster this way than if you simply make a one time investment and let it grow on its own.

Keep More of What You Make

If you run your own business, there are two main areas to look at here: one is to trim the fat from your expenses, and two is to maximize your tax strategies. Periodically take a look at how you are spending money company-wide and reevaluate absolutely everything: hosting costs, employees, advertising costs, etc. For tax strategies, try to pay for everything you can in your life using your business credit card and keep good receipts and records. If you travel, use my travel savings tip to save up to 40% on all personal travel using tax deductions.

Don’t Touch It

As your savings grows, it may start calling to you, “I need that new car”, “I need that trip to France”. Don’t give in. If you find yourself needing money for occasional big costs like trips, consider setting up a separate savings account for this. One account would be your main nest egg, and the other is for occasional trips and big purchases. You could allocate 80% of your monthly savings to your main account and 20% to the secondary account. This will slow your overall savings growth, but as long as you commit to not touching your main account, the secondary account could save you from disaster when you decide to deplete your main savings account for that cool car or trip.

The most important tip I can offer is to live within your income means while saving a percentage of it. Spend only your disposable income, but don’t touch your investments or savings except for true emergencies and life changing expenses (like a home down payment or tuition).

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Sunday, November 18th, 2007 at 6:32 pm and is filed under Web Business. If you like this post why not subscribe to my full text RSS feed. You can leave a response, or trackback from your own site.