Lattes and smashed avos are great, but what are we really doing with our money?
3 Savings (and Investing) Rules To Live By In 2018
All of us have a limited amount of income, so by definition, we must spend less than we earn to get ahead.
We want to get ahead financially because we have passive-aggressive bosses who drive us up the wall, we haven’t had a holiday in five years, or we would like to spoil ourselves or our family without crying ourselves to sleep.
As Tony Robbins writes in his book, Unshakeable, we want to ‘own the economy’ – not work for it.
Having your money work for you gives you choice. And choice allows you to do what you like, it gives you control of your life. From that point on, your finances will empower you.
1. Get a Handle on Your Savings Rate
Most of us spend our days figuring out ways to invest money and grow our wealth. Bitcoin, a property portfolio, currencies or shares.
Unfortunately, many of us forget that it’s not about how much we earn but how much we keep because our ‘net worth’ is just the leftovers of what we didn’t spend.
Start with your savings rate, the wedge between your income and expenses, and track it over time. In January, how much will you earn? How much will you spend? The difference is your savings. If you saved $400 and earn $2,500 that’s a savings rate of 16% (400/2,500).
Your goal: Get your savings rate to 20% in February.
Tip: Track your expenses using a piece of paper and a bank statement or start using the MoneySmart TrackMySPEND App for a month.
2. Pay Yourself First
Once you know what you are spending, start paying yourself first.
If you have a money jar of the important stuff, most people put expenses like the mortgage and food in first.
But why not put yourself first?
You: “Wait, what? What’s a money jar?”
The idea behind this strategy goes back many moons to a question my teacher asked me and my high school classmates.
(She was trying to convince us to study for our final exams — yeah, right!)
Teacher: “Imagine you have a jar, which you can fill with your time. You have so many things to do that not everything will fit in. How do you make sure you fit as much as possible into your jar?”
I was silent because I had no idea.
Another (smarter) student said, “You put the big things in the jar first”.
Teacher: “Correct! But why is that?”
Student: “Because the little, less important things will fall into the jar around the big things. So you put the big things in your jar first.”
That analogy stuck with me.
The lesson was this: think about the spending and savings that are most important to you and put them into your jar first.
For me, when I think about my finances the most important things are my savings/investments and my family’s future. Not my car, Friday morning coffee or a new TV.
Once you have a handle on your expenses, you should be able to ‘pay yourself’ on the first day of each month.
3. Invest in Yourself
Good things take time, but they don’t come to those who wait.
“You make your own luck”, as Harvey Dent from Batman would say.
Invest in yourself by working towards a promotion, hobby or a new career.
It doesn’t necessarily mean nightschool or a university degree, but perhaps it’s an hour each day devoted to you. I try to spend an hour each day reading and learning a new programming language. It doesn’t cost me anything and I don’t always fit it in.
But if you’re working your butt off 8 hours a day for someone else, you may as well do it for yourself on your train ride, or listen to a podcast when you’re in the car.
So how does this relate to savings?
Growing your wealth means one of two things:
- Less spending
- More income
By investing in yourself you will gain new skills and become more employable. In an ever-changing world most of us will have more than one career in our lives, so you may as well get ahead of the curve.
What it Takes
To recap, growing your wealth comes back to a few basic rules.
Understanding your budget, paying yourself and investing wisely.
Get those right and the other stuff takes care of itself.
Cheers to our financial futures!
Founder, The Rask Group
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