The money that you save has a value today and a value in the future.
Aside from money that you save for emergencies, or to pay for a trip or other expense, the real value of money that you save today is the value that it can provide you in the future.
So, a dollar today is exactly that: one today dollar.
And, you can choose to do one of two things with that today dollar:
1. Spend it, and its ability to be a future dollar is gone forever.
2. Save it, and it becomes a seed to earn more dollars for you in the future.
Saving money should be among everyone’s financial goals, regardless of age. Saving money, or the “saving habit” as Napoleon Hill put it so many years ago, is the foundation of all financial success. Yet, so few people save.
Here are the core principles of saving:
Pay yourself first. The single best way to begin saving money is to use a technique called pay yourself first. It has been proven time and time again to cause people to change their behavior, and is probably the single most important money saving tip that’s ever been developed.
Savings should be your priority, not something that is considered what’s “left over” at the end of the month. And the best time to save is as soon as you get paid. The longer you wait, the more likely the money will be spent.
An easy way to start saving is to simply deposit 10% of every paycheck into a savings account. This works well and requires little thought. Simply setup an automatic transfer with your bank to move a percentage of your income from your checking account into your savings account each pay period. The advantage of using a percentage is that the amount you save is proportionate to the amount you spend. Over several years, you will build up a sizeable saving account just doing this alone.
Kill your debt. In last week’s post, we talked about how money can fly away from you when you carry a credit card balance. Simply eliminating how much you spend each month on your debts is the fastest way to free up money. Once the money is freed from debt payment, it can easily be routed to savings. Plus, the sooner you pay off debt, the less interest you’ll pay, and that money can be saved instead.
Setup an emergency fund. Probably the only money-saving activity that should be done before getting out of debt is to create an emergency fund (setting aside enough money so that if you lose your income, you can survive for 3-6 months). If you don’t already have an emergency fund, you should start contributing to one immediately. Consider an emergency fund a safety net that keeps a person from having to put an unplanned expense on their credit card.
Track and cut expenses. Edward Deming said “inspect what you expect.” Put another way, you can expect to receive later, what you inspect now.
What you save falls between two activities: how much you make and how much you spend. Since you have more control over how much you spend, it’s wise to take a look at your expenses.
Write down everything you spend your money on for a couple of months. Be as detailed as possible, and try not to leave out small purchases. Keep a small notebook with you at all times and so that you can get in the habit of recording every expense.
After a couple of months take a hard look at your spending patterns. You’ll probably be surprised when you look back. You’ll likely see some obvious cuts you can make.
However, you may need to make some difficult decisions. Think about your demand and make cuts that support you achieving financial freedom. Calculate how much those cuts will save you each year, and you’ll be much more motivated to save.
Building a financial future — whether it’s your retirement, your family’s future needs or simply attaining your personal goals and getting the things you want out of life — all starts with saving.
Billionaire investor Charlie Munger has always said that the most difficult hurdle to becoming financially independent is saving the first $100,000.
Once you cross that threshold, you will have the money necessary to make investments that can have a real change in your net worth.
Save for your future.
Save for your freedom.