One of the most ironic aspects of modern life is the lack of instruction on how to handle money, especially considering the consequences of poor money management.
There are only three things people can do with money: spend it, give it, and keep it.
The proper balance is important. If you spend everything, you’re broke. If you give it all away, you’re still broke. And if you keep all of it, you’re a miser.
Unfortunately, most of us are off balanced. We spend the majority of our day working for someone else and we keep little, if any, of our earnings which makes giving money away especially difficult.
You are productive, shouldn’t your savings be productive too?
Most people like to dream about a day in the future when they no longer have to work for someone else. Some people call this retirement. For others, it’s simply the opportunity to do work you enjoy when you want to.
This dream is possible if you start working for yourself today instead of simply collecting and then spending your paycheck. This decision is vital because you might need to radically restructure your finances. But first, you’ll need to have some savings to work with.
The more you save, the faster you can realize your dream. Consider 10% of your salary a good starting point. If you think that’s impossible, pull your head out of the clouds. Many people tithe 10% of their salary and save for retirement.
Break the paycheck to paycheck cycle
Living paycheck to paycheck works for some people, at least until it stops working. Not only is the lifestyle risky, but many of life’s pleasures remain out of reach (freedom, retirement, etc). Below you’ll find three types of savings and how to safely make your savings productive.
1. Life happens
Life happens, sometimes at the most awkward of times. For this reason, you should have at least 3-6 months of income set aside for emergencies. Stash the money in a high-interest savings account to protect yourself from inflation while still keeping it accessible.
2. Big purchases
Many of life’s biggest expenses can be anticipated (cars, college, and houses). And because these expenses are typically no more than 10-15 years out, you should be able to estimate how much you’ll need.
Make sure you carefully consider your assumptions. You will need to save significantly more if you plan to pay the majority of your children’s college expenses. Also, remember that the costs vary dramatically from college to college (just like with cars).
If college is five or more years away, you might want to invest in the stock market via a tax-advantaged account. Otherwise, you’ll want to stash your savings somewhere safe like a high interest savings account. Your down-payment and car savings will be safer in a savings account as well (just make sure to keep your different savings categories separate on paper at least).
3. Nest egg
Retirement is the biggest expense we can anticipate and yet most people do not save enough or even save for retirement. This is tragic because people deprive themselves of freedom later in life by indulging in short-term conveniences and luxuries.
Your nest egg isn’t necessarily just for retirement. For example, you might want to change careers, perhaps to something you would enjoy in semi-retirement. Whatever your goal, it is important to clearly define what you want to do and how much you’ll need to do it.
A clearly defined plan will help you save enough if you start now. How many dreams remain unpursued for lack of a plan? Do you have any long-term goals? How do you plan to make them a reality?
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