We are introducing a new segment of our content with Financial Freedom Friday’s. In order for you to reach your financial goals, you are going to need to save money. Whether you want to save enough money for the down payment on a home, want to make sure you retire comfortably, pay off your debt, or if you want to leave a legacy for your kids.
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Traits of the successful
The most successful among us understand it is the small, consistent, steady process that creates the results you are looking for. The reason I preach consistency is because if you do something long enough, you are going to gain momentum. If you are inconsistent, you will lose your momentum and that is the worst place to be because you have to start over in many ways. Your financial freedom is no different. You must take small, consistent steps to achieve the results you want. If you are looking for a “get rich quick” approach, you open yourself to be taken advantage of. Put in the work now and you will feel confident in results later.
Why is hard to save money?
78% of Americans are living pay-check to pay-check. This is important because 78% of the country is not poor. There will be people who are making $1,000 a month and there will be others who are making $10,000 a month. It highlights that fact that there is a spending problem in most households. It shows that most people are chasing happiness through external means. They are looking for things to purchase to help them feel complete. Since there is always a bigger house, newer car, beautiful vacation getaway, and fancy dine-in restaurant they never feel fulfilled. When you define happiness through external measures, you will never achieve happiness.
The one thing you never knew you always wanted
You are sitting at home and a commercial comes on and shows someone looking successful and happy while they are driving a luxury car. The commercial does not even go into any of the features or details of the car. It is just the successful looking person driving with a confident smirk on their face. These commercials are built to specifically target human needs that motivate us to take action.
Save money to lend money
In our current society, the person who is lending the money is building wealth and the person who is borrowing money is getting poorer. If you purchase a home for $300,000, with a 4.5%, 30 year interest rate – you will pay $250,000 in interest. Which means you ultimately purchased your $300,000 home for $550,000.
The problem with having so much of your money tied up paying back interest in a loan is you lose the ability to save and invest the money in a more lucrative way. For instance, if you have a $600 car payment each month, you are limiting your ability to invest your disposable income in assets that grow in value. Since an automobile is a depreciating asset, it is losing value every year, even though you continue to invest $600 per month into it. It is the same as a person putting $600 into a losing stock every year.
Credit cards have their own issues where you are being charged with compounding interest. What this means is every payment has an interest charge calculated based on the balance. And a portion of your payment will cover the interest and a portion of your payment will go towards the principle. Because the interest is based on the balance, you end up paying a compounding amount of interest on the same balance each month you have a balance.
As you can see, there is an advantage to being the lender. Therefore, you want to make sure you allocate your money in a way that enables you to be the lender and not the borrower.
40% of people are borrowing to spend
Did you know that 40% of people are reported to spend more than they save each month? That is a startling statistic and that makes it difficult to get started on the right financial footing. It is important we are introduced to sound financial strategies at a young age in a controlled environment. My parents helped me get my first credit card when I was a teenager, working at the local grocery store. My mom told me to use the card once a month on lunch and to pay the balance at the end of the month.
For most of us, we are introduced to credit at college when credit card companies are handing out cards. Their goal is to get you to establish habits that help them grow their bottom line. College is a dangerous time in general because you are being given a lot of money, even though you are generating little to no income. It is solely based on a future promise to pay all debt accumulated.
How do you know it’s a trap?
If you have no job and no income at 50 years old, would the credit card company give you a card? Believe when I tell you, they would say no in a heartbeat. Another way to think about this question is… would I lend myself $500? As much as love myself, I know I wouldn’t have loaned college Dre $500. He wasn’t making a lot of money and he was wasting his money on video games and motorcycles.
Now that we both agree that giving a college kid credit is probably not the best decision as a lender, why are they doing it? It is because credit card companies are attempting to create poor lifetime spending habits instead of showing you ways to save money.
Save money automatically
Let’s focus on building habits that will help you live your dream life. In this day and age, you don’t need to keep a sheet of paper or excel spreadsheet of all the things you spend money on. There are several great apps out there to help you save money automatically. You can search your app store for the one that works best for you and your needs. The goal is for you to become aware of where you money is going. Once you understand how your money is spent, you can decrease or increase accordingly.
Invest first, then spend the rest
Think of it like the money you put away for your bills or charitable contributions. As soon as you get paid, you pay your mortgage, utility bill, and purchase some food and gas. You may have more items on your list, but there are a set number of items you know you must pay on a regular basis. Then you use the rest of the money on a more ad-hoc basis. If you can see investing your money to grow your money the same way you see your bills, then you will fund your investments as soon as you get your check.
The difficulty with most people investing first is that 78% of people are living paycheck to paycheck. This means all the money from each check is allocated to something. However, by investing first, your money is growing for you, instead of against you when you are borrowing a lot of money. As a result of your money growing, you are better positioned to have the extra income necessary to pay off your debt.
Stop trading time for money
If you are always spending your money, then you cannot grow your wealth. When you put your money to work for you, it can generate more income for you in the future.
I am someone who believes an integrated plan works best to achieve your lifetime financial goals. An integrated income plan simply means every option has a pro and a con, so we use them in a way that compliments each other. By using them together you can achieve a better result than any individual product or strategy can do on its own.
As a result of living in a more emotional world, some people have strong feelings about one strategy over another. This is driven in part by people who focus on the benefits of one product over the cons of another. I like to think of it like a contractor tasked with building a house without a hammer. Sure, the hammer may be worthless if you are trying to saw a board of wood in half. However, that doesn’t mean it is worthless when you need to push some nails through. It just means it should not be used in that manner.
Where to save money and where to spend money
One of my favorite books is, The Richest Man in Babylon. The book has a consistent approach to building wealth that I highly recommend. The basics are you live on 70% of your income, invest 10% and use 20% to pay off your debts. Once your debt is eliminated, you will reallocate that 20% from debt towards investments. This is just a framework, so you can make adjustments that work well for your household. I’ve seen approaches where you live on 70% of your income, 10% for charitable contributions, 10% for lending to others (and they pay you back with interest), and 10% to invest.
Throughout your life, you want to get away from trading your time for money and you want to have your money working for you. Half way through your life, half of your money should be generated passively and half of your money should be generated actively (trading time for money). The only way this can be accomplished is by you mastering your ability to save money.
Avoid blind spots
Everyone has a blind spot where they are not keeping track of their spending. For some, it is their kids and for others it is the food they eat. The problem with not keeping track of all of your finances is the money ends up disappearing into your blind spot. As a result, whenever you have more money, you don’t seem to be able to keep track of where the extra money is going. More times than not, that extra income is being spent on the items you not keeping track of. Tracking has been proven to consistently improve your ability to achieve your desired results.
For you to achieve your financial freedom, you need to save money and put that money to work. We are not talking about putting money in an account that earns .00001%. You want an account that works with your near term financial needs and long-term financial goals.
Until next time,
Dre “Better Self, Better Wealth” Griggs