Tara Unverzagt January 18, 2019 No Comments

Are You Ready to Start Saving Money?

Saving money doesn’t happen by accident. It doesn’t happen because you want it to happen. Saving money takes some thought, planning, and action on your part. As they say: the definition of insanity is doing the same thing over and over again and expecting a different result. If aren’t saving and would like to, you need to find a new approach.

Bubble Gum Money vs Savings

Raising my kids, I gave them an allowance at a young age so they could learn about money. You can read more about teaching children financial skills in our article Saving Your Bubble Gum Money. In my house, bubble gum money was money the kids could spend immediately on anything they wanted. (My youngest used it mostly for buying bubble gum when she was under 5 years old.) But they also saved some of their allowances. They couldn’t touch “savings” unless there was something they were “saving” for. In a four-year old’s world “saving for the future” meant they had to wait at least a week before they were allowed to make the planned purchase.

If you see something and buy it, you should be using your bubble gum money. Otherwise, you should put money aside to save up to make important, large purchases that you’ve thought through carefully.

If all your money is bubble gum money, you’ll never accumulate assets that are needed for things like taking a year off work, buying a house, having kids, retiring.

You may not even have enough to pay for a simple vacation. Once you have learned the difference between bubble gum money purchases and planned expenses and transitions, you’ve taken your first step toward financial success.

Never fall in the trap of borrowing in order to “spend less than you make.” Any consumer purchase (furniture, a phone, a car, anything that does not increase in value) should be purchased with money from your savings. Borrowing (payment plans, leasing, etc.) to consume allows you to feel like you’re spending less than you’re making, but you aren’t. The credit card companies, banks, and stores love to convince you that “you can afford this low monthly payment.” Those “low monthly payments” can add up to big debt very quickly. Don’t fall for their trap.

Make Saving a Habit

How much should you save? There is no one answer to this question. It depends on your expenses, your income, your future plans, what’s going on in your life right now, etc. The rule of thumb is 10%-25% of your income should go to savings (and paying down debt). If you’re a single mom making $30,000 living in Los Angeles, CA, you are not likely to be able to save 10%. But save what you can. Save something. Anything. Even $10 weekly is better than nothing.

Saving is a habit. The first step is to integrate the habit into your life. When you get your pay check, put some into your saving account. It doesn’t matter how much–just do it. You can set it up to have it go automatically into savings without any thought.

When you get non-paycheck money, make it a habit to transfer a certain percentage to savings, such as $10 for every $100 you receive. When you get your tax refund, you’ll be in the habit and will put whatever percentage into savings. When you get a bonus at your job, you automatically save a percentage. Better yet, put is all in saving and give yourself some to splurge. Put the $100 in your saving account and give yourself $10 to blow on whatever you want. You weren’t expecting that money anyway.

A habit is a trigger, an action, and a reward. The trigger is “you receive money.” The action is “you put money into savings.” It’s important to have a reward to make the habit stick. You might check your saving account balance and have a happy feeling. You may see how close you are to reaching your goal. You may invest your cash every time you hit $1,000 (another good habit). A simple act like saying “ka-ching” like a cash register adding up the total, can be a reward. Find what works for you.

As you watch your saving account grow, or not, you should be motivated to save more. When you get to the point where the money comes in and the first thing you think is “put my savings away,” you’ve developed the habit. Congratulations!

Make a Savings Plan

There are three levels of savings: emergencies, opportunities, and asset accumulation. Your emergency fund allows you to have money on hand to take care of unexpected or anticipated, but not planned problems. Your opportunity fund allows you to have fun or take advantage of opportunities that come up. And asset accumulation allows your money to pay yourself at some point in the future.

We all find ourselves in a position that an unexpected expense pops up from time to time. Plan for it. If you want to stay away from the high cost of credit cards and pay day lenders, have an emergency fund to fill that need. If you want to have fun and not feel like you’re living paycheck to paycheck, have an opportunity fund. And if you want to one day have a choice to retire or cut back on working full-time, think about accumulating some wealth so you can pay your own paycheck.

If all of this sounds easier said than done, schedule a FREE 15 minute call with us. We are here to help!

Plan to Win

I spent last weekend bicycle racing, my favorite activity! It was the Master State Championship, so considered a “big race” to some and a stepping stone to the National Championships for others. Thinking about how racers deal with “big races” whether it’s the local weekend race or the World Championship, I realized how similar it is to investing and financial planning.

Everyone approaches both with wishful thoughts of “making it big”. Some are instantly pulled back by fear. Fear and doubt can make even the fastest person a loser. Often, fear prevents a racer from even showing up to the race, which is a guaranteed way to not win. Life is risky. That has to be accepted first. Then you can start looking at ways to limit failure and maximize gains.

Having a plan is a great way to start. But a plan that is ignored will get you nowhere. In bike racing, many people hire a coach to help make and execute a plan. I can’t tell you how many great racers will start to change their plan or equipment as they get closer to the “big race”. Change at the last minute is usually a great way to fail at meeting your goals.

Why do they do it? Fear. They think that if they work harder, longer, or have better equipment, that would guarantee a win. It usually leads to overtraining, poor recovery, bad form, and discomfort in the big race. If they worked their plan that is making them stronger and faster, they would actually be enhancing their chance of success far more. Coaches can be great at helping you stay focused on the plan, if you listen to them.

So how does this relate to investing? Many times people don’t make a plan because they’re afraid to think about that big college bill or if they’ll have enough money to live the way they’d like in retirement. Face it head on with a plan outlining how you’re going to make it happen. If you can’t do everything you want, it’s best to know that up front and get the most you can. Without a plan you are likely to miss out on goals that you could have achieved if you had a plan.

People also often invest emotionally. You want to buy low and sell high to be successful. While people know this intellectually, they often do just the opposite. They get excited as an investment price or the stock market goes up. As the prices go down people get scared and want to get out of the scary situation. Before you consider making a change to your investments first stop and think through whether you are making decisions based on emotions or information.

A solid plan will help you figure out where you are going and how you will get there. A financial advisor can help you build a solid plan and help you relax so you can maximize your plan with periodic reviews. Just like a training schedule, the plan is going to be different during different seasons (diversification targets will need to be updated occasionally). Your advisor can help you adapt your plan for the seasons as well as to address your personal goals in a thoughtful way. With or without an advisor, make a plan. Remember “not showing up” is a guaranteed way to not win. The more you follow and trust your plan, the more likely you are to win.

If you’d like articles like this delivered to your mbox, scroll down to subscribe.