The Power of Savings
Savings is where everything starts, it is where you start to put money aside to increase your wealth. You will invest a part of this money, and you will save another part forever and let this money grow to make you richer.
A lot of people tend to think that they have to skimp on everything in order to create a worthwhile nest egg. While this tactic does help, it also means that some things will have to be foregone or even given up. Think about it, you do not have to get the cheapest term life insurance, or the beat-up car on the side of the road that probably will not even make it home. Likewise, you also do not need the most expensive of luxuries either. Simply shop around and try to find a good median to settle on and put the leftovers into your savings account.
If you feel you can't save a penny I recommend you read how to reduce your expenses before you continue, and if after that you think you still can't save a penny you should consider monetizing a hobby, increase your ability to earn (education) or take another job. Moaning and complaining about how bad the world is to you won't change your situation, you are the only one that can change it.
No need to say you should pay off all your debt before start thinking about saving and growing rich, as I said previously paying off your debt is the best invesment you can do.
Pay yourself. Save at least 10% of your earnings
This is the first golden rule in The Richest Man in Babylon
You should save at least 10%, but if possible you should save more. I aim to save at least 30% of my income. Would you be able to survive with a 30% salary/income cut? If the answer is yes, you should save this money.
There are two main benefits of saving:
- Firstly: the money sums up in a monthly basis, and the more you have the more it grows.
- Secondly: it gives you a pot of available money you can invest if the right opportunity comes along.
Let's see the first benefit mentioned above, I'd like to introduce to you...
The power of Compound Interest
Wikipedia definition: Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding (i.e. the interest is compounded).
In another words, savings itself are a source of income (if you put them into a savings account, not under the mattress!). If the woman of this story would have put this $1 million in a savings account with a 5% interest she would have made $4166,67 a month before tax!!!
Feel free to use the calculator on your right hand side to calculate how much your savings could grow.
Never spend the savings, never
Savings have only one objective: generate more money.
In order to do that you can do two things: keep saving or/and invest them. Preferably both, save a part and invest the rest.
I recommend putting a part of your savings in a high-interest rate account, from which you normally can't touch it until the contract period has expired (1 year, 2 years, etc.), the longer the period the higher the interest.
The rest of savings should go to a flexible savings account, from which you will earn less interest but you will dispose from the money whenever needed. This will be the savings/investment account, let me money make some more money until you find an investment opportunity.
The only exception...
Buying without borrowing: although you should try to limit the use of savings for this purpose, you can use savings to buy certain liabilities (car, tv, home appliances, etc.) without borrowing money, avoiding this way the payment of interest on these items. In my opinion it doesn't make any sense to borrow money to buy such things. If there's any alternative payment method that doesn't make you pay interest, go for it. If not, use part of your savings to pay it. If you borrow money you will have to pay back the borrowed money plus interest.
But remember, try to buy only things you really need. Do you really need a BMW when a smaller and cheaper car would do the same job? If you start spending money for liabilities you will end up without a penny in your savings account, and that's not what we want.
To me borrowing money only makes sense when buying a house, since it can increase its value over time but that depends on many factors (location, location, location). But bear in mind that if you commit to a 25 year mortgage you are paying the price of the house 3 times or even more. I would think it twice.
My approach to savings
At some point I used to save 40% of my earnings, and believe me, I wasn't a high earner. I put 15% in a savings account from where I will never touch that money and the other 25% in another savings account that gave me a bit less interest but with higher flexibility (I could take the money whenever I needed to). The last one is my savings/investing account, I leave the money there until I see a good investment opportunity.