For years now, Americans have been among the world’s worst savers. This is most astonishing since we live in one of the most prosperous nations in the world. The 2014 Bureau of Economic Analysis reported that Americans on average saved only 3.8 percent of their disposable income. Compare this to the 13.3 percent saved annually back in 1971 . . . what are we doing? The average Chinese household saved 50 percent of its disposable income last year and in India over 30 Percent. Why is there such an enormous discrepancy and why are Americans so consumptive?
Proverbs 21:17 says, “He who loves pleasure will become a poor man; He who loves wine and oil will not become rich.” Solomon offers a telling observation – people focused on pleasure and consumption will be poor because they spend everything they have on things they want for today. Unfortunately people focus on immediate gratification, and in many cases, they spend all they have and put the rest on credit cards, leaving themselves continually dangling on the precipice of financial disaster. You cannot borrow and spend your way into financial prosperity. You can save and invest your way into financial prosperity – living on less than you make. Until you come to love financial freedom and prudence more than you love pleasure, you will never move beyond a hand to mouth existence.
We need to understand that there are four basic steps to realize and apply to create and set aside surplus:
1. Manage your expenses – Budget your monthly income vs. expenses
2. Reduce or eliminate debt – Have a written plan to do this.
3. Accumulate surplus capital – Have emergency savings and long term savings.
4. Save and invest wisely – Apply automatic disciplines; get wise counsel.
It sounds easy, doesn’t it? It is easy, but it requires patience, self-control and a dedicated long-term discipline. At the start of your financial life once you have entered the job market, during the first 10, 15 or even 20 years or so of your career, your income tends to double or even triple. Nevertheless, in most cases, in the early part of your adult working life your savings are likely to be relatively low or even non-existent. Much, if not all of your income is spent on daily outgoings, establishing a family, renting or buying (and furnishing) your home, putting your children through education, paying for family holidays, etc.
Remember that controlling your expenses and reducing or eliminating debt is the first step towards building wealth and investing for retirement. Unfortunately, many people spend (almost) all of their income and save nothing or very little. Schematically your cash flow looks like this: you spend all your time working, which provides you with a salary that is then used to pay for all your goods and services (stuff) that goes back to you. However, there is nothing left for you to save or invest. This is why so many get into debt for unplanned expenses and unforeseen events.
Today, anyone can get into debt; it is very easy. It is during this time of life that the amount of your debt is likely to increase substantially due to mortgages, loans to cars or other debts. Debt can be used to pay for extra stuff and depending on the size of your salary this can be used to pay for the interest and repay the debt over time. In this case, your financial success depends on being good at handling debt. It would be better to never have to face this challenge. Unfortunately, it is not uncommon for families to spend 20 or 30 per cent or even much more of their income on debt and mortgage service as well as interest payments. They risk ending up in a debt spiral that is difficult or impossible to escape.
Start saving & investing right away
Don’t wait to set up disciplines of saving and investing. Always sign up for the matching portion of your work retirement plan and have a forced savings account in a segregated account for surplus and future investments. Automate additional personal retirement account investment plans or college savings so that you’re monthly putting something away; make it like a bill that must be paid. Save to buy a modest residence where the mortgage payment is similar to rent after your down payment and then rent out a room. Taking serious (drastic to some) steps will turn you from a future borrower to a giver, from a paycheck to paycheck person to one who has the financial freedom to multiply talents.
There are multiple books, websites and classes to help you set up these disciplines. But it will take your determination and effort to get going. The fruitfulness of even small disciplines and prudent application of financial decisions can be significant, and if practiced long term can be life changing. Get started now!
Jeffery Masters, President of Jeffery W. Masters & Associates. Securities offered through LPL Financial, member FINRA/SIPC. Investment Advice offered through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Jeffery W. Masters & Associates are not affiliated with LPL Financial. 954-977-5150 [email protected]