Pay Yourself First!
November 21, 2019
If you read the previous blog post or are in the enviable position of being debt free, the next step in your journey to financial freedom is to start saving. Saving money is really all about how you manage your income. After all, you can’t save money you’ve already spent. So, let’s dive right in and examine some useful tips for building your wealth.
When constructing a savings plan, one of the most important things to do is set your first goal. How can you hit a target if you don’t know where to aim?! Now what that goal may be is up to you. Be it ten thousand dollars, a million or more, it’s critical to have a target. Just be sure that it is feasible. You can always create a new goal once you reach your first. The sense of accomplishment that comes from reaching your first goal will feed your drive and enthusiasm for the next wealth accumulation plateau!
The magnitude of your savings really depends on how you manage your income. If you don’t already have a good understanding of your monthly budget, I recommend you read the previous blog to get an idea of how I recommend you direct your budget. Without any outstanding debt, you should try to balance your budget to maximize your monthly surplus, or at least have your surplus align with your saving goals. For example, if you want to save $60,000 over the next five years your goal should be to have a surplus of $1,000 a month. So cut costs where you can, not only from leisure expenses, but also recurring and habitual costs like your electricity bill or groceries. Saving even small amounts in areas like this can add up over time. Even though it may not seem like much, saving an extra $100 a month over 20 years is an extra $24,000 in your portfolio! So, don’t shy away from shopping for deals, buying generic, or packing meals for lunch. Just remember that the sacrifices you make now will add up and in the long run can get you to your goal of financial independence that much faster.
Once your monthly surplus is in line with your savings goal, your job is basically done, right? You need only stay diligent to the budget you set up and surely you will be on track to reach your savings goals… right? Unfortunately, there is a little more to account for. If saving money is like a trek up a mountain, then unexpected expenses are the giant boulder that comes out of nowhere and blocks your path forward. There are plenty of different ways to prepare for these unexpected costs. The most important thing is that you have some way to account for them within your budget that will allow you to stay on track. One example would be setting up an emergency account, where you could place 10-20% of your monthly surplus until you reach the amount that is comfortable for you. Don’t touch this money for ANY REASON other than an absolute emergency, such as a car accident or medical expenses. If you’re fortunate and never need it, then you can apply it as the final push to put you over the top.
Escaping debt, and properly nurturing your investments are the first steps toward building enough wealth for you to achieve financial freedom. The habits you develop will be the key to building your wealth and maintaining it throughout your entire life. Don’t cut corners or make excuses. Financial freedom can be yours, so long as you adequately prepare for the journey and stick to your plan.
In my next blog post, I’ll address the importance of mitigating taxes and optimizing the return on your capital. Albert Einstein said, “Compound interest is the most powerful force in the universe.”