If you want to be better off tomorrow, then you have to start saving today, and every day, for the rest of your life. To develop the savings habit, it’s helpful to think in terms of three buckets: cash reserves, investments, and retirement accounts. When you learn how to work these three tools, optimal financial well-being will be within your grasp.
Query: What’s the difference between “saving time” and “killing time”? Answer: Not much. It’s all a matter of perspective.
This past Thursday I was in Atlanta, Georgia to give a speech to the Columbian Chemicals Company as part of their weeklong HealthWorks program. My topic, “From Goals to Goosebumps,” was designed to move people from the “should-a, would-a, could-a” thinking of goals to the titillating world of possibility thinking and passionate living. The event generated about 30 new subscribers to Provisions as well as several inquiries for personal LifeTrek Coaching. Welcome!
My return home was marked by a voluntary 5-hour delay, due to an oversold airplane, which netted me a complimentary roundtrip travel voucher. Instead of racing home to get back to work, I unexpectedly found myself with 5 hours on my hands “to save” or “to kill”.
Which would it be? The choice was up to me. I decided to “save time” rather than to “kill time.” “Saving time” means to use time efficiently. “Killing time” means to waste time. And time is one thing none of us can afford to waste.
In my case, I used those 5 hours to enjoy a leisurely dinner, to read an inspiring book (The Art of Possibility: Transforming Professional and Personal Life by Rosamund & Benjamin Zander), and to coach some friends through the process of getting ready for marriage. It was a most delightful time, which all took place on the C Concourse of the Hartsfield Atlanta International Airport. Who would have guessed.
That’s what happens when we start saving rather than wasting. Whether it’s time, money, or anything else, using our resources efficiently generates great satisfaction and rewards. Had I been “killing time” in the airport, my 5 hours might not have looked very different. I still might have eaten, read, and talked on the phone. But my awareness of how I was “saving time” enabled me to do those things well • generating a great return on investment.
This is the approach I recommend taking when it comes to “saving money.” Mindfully building up your financial reserves can generate more satisfaction and rewards than the purchase of any consumer good. It may not, at first glance, have the same appeal as the latest and greatest commodity, but the freedom it generates as those reserves begin to grow through the miracle of compound interest is beyond compare.
Of course, our ability to plan our savings is contingent upon our mastering last week’s matter of planning our disbursements. Until we get our disbursements under control, until we start making more than we spend, there’s no way to plan our savings. Instead, we will find ourselves going in the wrong direction with an ever-increasing load of debt.
And debt is certainly a load. All debt is structured in favor of the creditor, not the debtor. That’s why you will typically pay more in interest for a home, than you paid for the home itself. Car loans and credit card debt work much the same way. The interest gets paid first, and then the principal.
The first step to planned savings, then, is to develop a plan for getting out of debt as soon as possible. If this requires you to cut up your credit cards, then so be it. Many people have switched to debit cards for just this reason. If the money’s not there, then you can’t spend it.
To pay off your credit card, you will want to work on the card with the highest interest first. Pay the minimum on all the rest, and putting everything you can against the first card until you pay it off. Then move on to the other cards, continually adding to how much you pay every month, until all the cars are paid up and accounted for.
A better strategy may be to cut up your cards, if need be, and pay them all off through a home equity loan or a debt consolidation loan. Home equity loans have the advantage of tax-deductible interest, in addition to a much lower rate than most credit cards.
Once you get out of credit card debt, you will want to develop a plan to pay off your home mortgage and car loans as quickly as possible. There are many ways to accelerate these loan schedules. One extra home mortgage payment a year can usually knock about 6 years off the life of a 30-year mortgage. No matter what the size of your loan, we’re talking big savings and big money here.
These strategies to get out of debt are part of a comprehensive savings plan. Once you have structured things so that your receipts consistently exceed your disbursements, it becomes possible to get out of debt and build equity all at the same time. And once that snowball starts rolling down the hill, it really picks up steam as time goes on.
It may be helpful to consider three kinds of savings buckets, and how they interrelate. One bucket is cash, the second bucket is investments, and the third bucket is retirement. Unless we have a plan covering all three buckets, we don’t have a comprehensive plan that can effectively carry us all the way through to the grave.
Cash. How much cash do you have right now? How much cash do you need? I believe that we need cash reserves sufficient for at least three and ideally six months of living expenses. Such reserves enable us to weather the storms of life, which come to one and all. Cash is any money that you can get your hands on in a matter of days, without suffering any loss of principal. This includes real cash as well as funds on deposit in instruments such as checking, savings, and money market accounts.
Right now these cash instruments are paying very low interest rates, but not to worry. The point of cash is not to grow as an investment. The point of cash is to provide the reserves that give you the freedom and the courage to dream dreams and to make them come true. With sufficient cash reserves, you are not a slave to work. Instead, you become it’s master with a low tolerance level for unhealthy environments.
If you do not have sufficient or even any cash reserves, then it’s time to enter in upon a disciplined savings plan. It’s really not that difficult. Just decide how much you can set aside each week and do it before you do anything else. Pay yourself first, in other words. If possible, set it up as an automatic deposit into a savings or money market account through your employer. That way you won’t even have to think about it or do anything in order for it to be done.
In addition, at the end of every month, put any extra cash that you can afford as well as any gifts into the same savings or money market account. This practice can really help your reserves to grow quickly. Many people find they can accumulate three months of living expenses in three years or less.
Investments. Once you accumulate these cash reserves, it becomes possible to play with longer-term investments that have the potential to generate a larger return as long as you are willing to accept a larger risk. With the downturn in the stock market, many people have felt comfortable, for example, investing in bond funds or real estate investment trusts. It’s always possible, of course, that you could lose your money here, but the risk is small and the return can easily be above 6% or even 10%.
In order to play this game, it’s easiest to keep adding to your cash reserves on a monthly basis and then drawing down money for investment as opportunity arises. Many investments require a minimum that most people will never achieve on a month-to-month basis. But after several years of accumulating cash reserves, you will have sufficient funds upon which to draw.
Retirement. The retirement bucket is a specialized form of investment that is usually very long term and highly regulated. Since retirement earnings, at least in the United States, are not taxed until they are drawn down after retirement, there are severe restrictions and penalties for early withdrawal. Many traditional pension programs do not even permit early withdrawal except for certain special, emergency circumstances. IRAs and 401(k) plans may permit withdrawal but you will suffer a 10% early withdrawal penalty in addition to having to pay taxes on the withdrawal.
In other words, don’t do it! This investment needs to be used as directed: for retirement. If you work for an employer with established retirement savings programs, especially if there are any matching programs, then you will want to take full advantage of these programs, even before you have built up your three months of cash reserves. If you’re doing this on your own, then be sure to balance the need for cash reserves with the need for retirement savings.
It’s a good idea to get in the habit of adding to both your cash reserves and to your retirement savings on a monthly basis. Since retirement savings are usually quite long term, unless you are 55 or over, you may feel comfortable investing in equity funds or other more risky instruments. If you don’t want to take the time to learn how to do this yourself, then mutual funds are a good way to earn an average of 10% a year with a diversified portfolio. That has been their history and, most people expect, their future.
Retirement savings are where we see the miracle of compound interest really coming into play. With enough time, even small amounts of money can grow into large amounts. When people start in their 20s, it doesn’t take much at 10% interest to become a millionaire by the time you’re 65. But the big dollars don’t appear in the equation until the final 5 to 10 years.
The key is to get into a savings habit for all three buckets. Those who get used to saving 10% a month at an early age can count on optimum financial well-being or wealth developing over the years. If you can’t manage 10%, then start at a lower percentage and work yourself up to 10% as quickly as possible. Don’t let anything distract you from this important discipline. If you don’t do it for yourself, no one else will.
And don’t ever think that you’re too old to get started. You may not have 40 years to work with. You may only have 30, 20, or 10 years to retirement. But whenever you get into the habit of planned savings, you will end up better off down the road than you are today. And that’s something worth feeling good about.
Coaching Inquiries: Do you have a habit of planned savings? Do you know how much you have set aside in cash reserves, investments, and retirement accounts? What steps could you take today that would make things better tomorrow?
LifeTrek Readers’ Forum (selected feedback from the past week)
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Thank you for all the great information you continue to send on a weekly basis. You are such a blessing, giving practical advice and hope, in a world where there is so much confusion and disillusion.
May you be filled with goodness, peace, and joy.
Bob Tschannen-Moran, MCC, BCC
LifeTrek Coaching International
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