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Billionaire investor Warren Buffett is quoted as saying: “Don’t save what is left after spending; spend what is left after saving”. Many people who followed that advice are thankful they did so.
The problem is that for people in their 20s, saving isn’t sexy. Partying and having a good time takes precedence. By the time they get to their 30s and 40s other responsibilities eat into their income with many complaining that there’s often “too much month left after the money!”
Pay-day loan companies, usually charging extortionate rates of interest, became popular to bridge the gap until the next payday, while easy credit meant many people quickly ran up huge bills that played havoc on their personal finances.
Few people really appreciate the difference between assets and liabilities and often get the two confused. In short, an asset is something that puts money into your pocket; a liability is something that takes money from your pocket.
Acquiring more liabilities than assets is a sure-fire way of becoming broke.
One useful savings habit to acquire is to simply set aside 10% or so of your income before anything else. The balance then needs to be accounted for to ensure that it lasts the course until the next payday.
Buying stuff needs a planned approach too. Robert Kiyosaki often says if he wants to buy something he classes as a liability (like a new car), then he’ll look to acquire an asset first that can support the cost of buying it.
Keeping a close eye on what you spend is important too. Jim Rohn advocated keeping good financial records so overspends can be analysed: if your monthly food bill is too high for your income, then it’ll help areas to cut back on.
In this regard the BBC has been running a good series called ‘Eat Well For Less’. In each episode a family’s food spending habits are looked at and simple suggestions made where the cost can be reduced.
Some of the substitutions aren’t that good, but on the whole many of the families that featured didn’t notice a difference or that the alternative was actually tastier!
Takeaways were reduced, but not eliminated – after all, we’re not living in a monastery. Coffee bought from a retail franchise is hugely expensive, yet people habitually buy these daily. Cutting back on these can save a small fortune.
At the end of the programme each of the savings were added up. They often amount to a few pence here and there, but cumulatively over the course of year can be substantial.
Typically families could save between £4,000 and £7,000 annually, with one family able to save a whopping £12,000.
Making similar small changes to our lifestyles can reap huge benefits without fundamentally sacrificing anything. It also frees up capital that can be invested to significantly build a person’s wealth.
Initially an investment might not be doing too much. But when the compounding effect over time is factored in, then the results can be awesome in the true sense of the word.
As an example, take an imaginary penny and double its value every day. So on day one you have 1p, on day two you have 2p, day three 4p, day four 8p and so on.
What’s the value after 30 days?
Understanding how this works is to understand the power of compound interest, which Albert Einstein called “the eighth wonder of the world”, adding: “He who understands it, earns it; he who doesn’t, pays it”.
Another way of setting aside money for future investments as well as budgeting for day-to-day expenses is the JARS money management system devised by T. Harv Eker.
This divides an income into six jam jars (or imaginary ones). The first is for necessities, the next is to cover long-term savings for spending, the third is play money to have fun with, the fourth is to spend on your financial education. The fifth jar is for your investment or financial freedom account.
The last jar might surprise some. It’s for charitable giving. Learning to receive comes off the back of learning to give.
Getting into the habit of making regular monthly savings, both from an income and by adjusting the way in which we spend our money, can lead to a portfolio of investments that can support your lifestyle.
Why not start today?
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