Blog 2: Spend every penny you earn!

As I reference in my first post, The secret to being rich, the first step in achieving wealth is to spend less than you earn. In other words, to save money. In this blog I will talk about why you should save, different tools you can use to help you, how much you should save and ultimately what to do with it once you have saved. If I am writing about saving money, why is the title of the blog about SPENDING?? Quite simply, you will spend every dollar you earn. The question becomes what will you spend it on? If you think about savings as spending money on your future self, you might feel differently about the concept.

Why be a saver?  

Saving money is nothing more than spending money on your freedom instead of “stuff.” Delaying gratification today, so that your future self can spend it. If you accumulate enough money, then someday you will have purchased your independence from working for money. In my mind, freedom is the most important thing money can buy. Freedom to do what you want, when you want with whom you want. So, at the end of the day, you will spend every dollar you earn. How much you will spend on yourself vs. stuff is the subject for today!

How do you save money?

The tool I have used most of my life is a budget.  A budget can sound intimidating, but I have found it gives me control, and I like that!  A budget is telling your money what to do vs. the other way around.   I use a spreadsheet, but you can use any software you prefer.  Start with documenting your income (i.e., money you earn) and then all your expenses (i.e., rent, food, gas), the difference is the amount you save (i.e., spend on yourself).   The budget I keep goes out more than 12 months, so I can put future expenses that I know are coming (i.e. college tuition) and ensure I have enough to cover it all.  It will take a little while to get used to it, but I have found it is essential to track everything and tell my money what to do!

There are different methods to control/track spending.  We used to use a cash method.  We’d take out the cash we had budgeted for the week and spend it.  When it was gone, we had to wait until the next week to spend it.  That is a little tough to do, but it was effective.  The next way is to use your debit card that is linked to your bank account.  Like the cash method, but easier to track what category you are spending on and more convenient.  What we do now is use a credit card for everything.  This is the most convenient, but the trick is you can get out of hand with how much you spend, because it’s just “plastic.”  I would not recommend starting with this method, but if you do, the most critical rule is to pay off your entire credit balance when the bill is due.  Do NOT carry credit card debt as they charge ridiculous interest (i.e., 20%).  So, something that costs you $100, might end up being $200 with all the interest you pay on top. 

How much should you save?

That is entirely up to how soon you want to buy your freedom.

This chart says how many years it would take to be financially independent (i.e., not have to work for money) based on various saving rates.  The amount you save is up to you, but my recommendation is to save as much as you can as early as you can and not try to “keep up with the Kardashians.”  Remember, being rich is what you can’t see.  There is a big difference between looking rich (i.e., fancy cards, clothes) and being rich (i.e., investments).

What to do with your savings?

We will go much deeper into investing in future posts.  But for now, what I would recommend is to have enough cash to cover 3-6 months of your living expenses.  This will be for an emergency and is also referred to an “emergency fund.”  Car breaks down, you have money to pay for it.  After you have that amount of cash, I recommend you invest the rest in the stock market.  Again, we will talk much more about investing in the future.

Master these simple behaviors early in your life and your life will be incredibly easier.  Live paycheck to paycheck, and you will never be happy.  You will be stressed about how to pay your bills.  I much prefer to spend my time living and being free to do as I please because I am not stressed about money.

OK, your turn!  Leave any comments or questions below!

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