“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” ~ James W. Frick
When I was a teenager, I had a piggybank to save small change so that one day I could give the entire box to my mom…. My parents often argued about money and spending (my mom had a tendency to spend more than my father was comfortable with) and I thought that my disciplined saving could help my mom to pay the bills without worrying about money….
One day, after some very tense situation at home, I broke my piggybank and gave my mom all my savings. She was shocked! She couldn’t believe that the “money tension” at home was so pronounced that it triggered my desire to offer “financial assistance” to my mother! I’ve learned that having savings can make you feel secure and you can use it to support yourself and others.
Because I grew up in a family with modest financial means, I was always aware of my spending and saving habits. I’ve experienced financial predicaments myself and have witnessed many other people going through financial hardships. These experiences made me determined to find feasible solutions to live life free of financial anxiety.
I’ve learned about energetic (metaphysical) aspects of money and have studied money management and best investment strategies with many wealth masters. And guess what? There is no shortcut to building wealth! You must position yourself for a wealthy and free life and this positioning starts with AWARENESS of your SPENDING and SAVING habits. To achieve wealth you must become a little richer every day.
Last week I shared with you the calculation of your Annual Spending Rate (ASR), which will help you to become AWARE of your current spending rate. Once you calculate your annual spending requirement, you can start focusing on your saving and investment money jars. When you are at the beginning of your career and just entering the self-sufficient life phase, you may not have a lot of money left after your spending allocation.
I invite you to make your best effort to put some money aside for your saving money jar. It will teach you to be more disciplined with your spending and help you develop healthy money habits.
Your saving money jar’s purpose is to provide you with peace of mind while you grow your wealth. When you have savings, you avoid becoming stressed out about your Must-Have—Must-Pay commitments and needs in case you lose your main source of income.
The idea is to put aside a portion of your current earnings to cover your needs in case of financial adversity like sudden unemployment or illness/disability and short-term, up-coming situations such as loan pay-downs or pay-offs, car or home repairs. Thus, your savings money must be safe and liquid—meaning easy to access.
I suggest that you start putting aside funds to save for the following:
- Emergency fund—up to 12 months’ worth of your Must-Have—Must-Pay spending money amount.
- Short Term fund—discretionary amount of money for something that you expect to pay for within two to five years, such as a new car, a down payment on a house, a college tuition or vacation.
Your emergency fund must be absolutely safe—your objective with this money is to preserve capital, not to grow it. This money is to be kept as super-safe to maintain value and very liquid. Given today’s economy, your savings could be apportioned among the following asset types:
- Cash (savings account with a small interest rate)
- Physical gold and silver bullion or coins
- Treasury notes—two, three, five or ten years U.S. debt obligations that are sold by the U.S Treasury Department and secured by the U.S. government
The way in which you choose to save your money is important. Allocating your super-safe funds across different kinds of assets (e.g. cash, bullion, notes) is called diversification.
Diversifying your money decreases the risk of losing the value of your money at once. The old saying “don’t put all your eggs in the same basket” is wise and reminds you about risk management.
Having emergency fund money is extremely important. Imagine for a brief moment that you’ve lost your job and need to liquidate your stock portfolio to cover your Must-Have—Must-Pay expenses. Then you realize that your investment portfolio has lost its value because of poor stock market performance…or worse, a market crash.
Unfortunately, a scenario like that is very real and has ‘burned’ many people. Your safe emergency fund money will allow you to cover your expenses until you find another job or find a new stream of income.
Your short term fund—discretionary money—can be held in safe, fairly conservative investment vehicles like these:
- High-investment grade corporate bonds
- High-interest, FDIC-insured bank CDs
- Market-safe FDIC-insured CDs, which fluctuate with the market but guarantee your principal investment
- Common stock of well-established international companies that have healthy balance sheets (low debt obligation and a lot of cash saved) and a long history of dividend payments to their shareholders
- Tax-free safe municipal bonds (not all municipalities’ bonds are safe—do your research)
When your timeline for using these funds gets close to two years away (say you have a debt obligation to fulfill)—reallocate this short term fund’s capital into safer investments, like those in emergency fund.
Your objective with the savings money jar is absolute, positive risk aversion. You can compensate low Return On Investment (ROI) in this fund by riskier but higher ROI investments in your investment money jar.
Read more about mastering wealth creation and management in the upcoming weeks.
*Some of the text was taken from my bestselling book “A Shift Toward Abundance.”
To Your Health, Wealth and Freedom!
With Love and Gratitude,