Learn to Save, and Spend

When it comes to money, is there anything more important than saving for retirement?

If you’ve read all the previous posts, you might get the impression that retirement is all we need to worry about. That was not my intent, and it is far from the truth;

Because of the many years until "retirement", it is easy to prove the "make your money work for you" theory when you have TIME on your side. So the longer you leave your money invested, the more it will grow. If you look back to "The Shocking Proof", you can see the total invested and total growth right at the bottom of the chart. After 40 years, you will have invested $542,889 with $2,229,560 of growth. If you go back to Year 20 it shows $193,467 Invested plus $235,236 growth. With the extra 20 years, you can get roughly 10x the growth while investing less than 3 times the amount.

What is important now, especially to a new investor is learning how to SAVE and SPEND.

If we save every extra dollar we have, we rob ourselves of enjoying life today. If you think about it, someone who has spent their whole life-saving everything and spending as little as possible has created that habit. A person in this situation has never learned to SPEND and will find it very difficult to do so when they retire.

On the flip side, a person who has spent every dollar they made and never saved a thing is going to have a tough retirement. At some point, they won’t have a regular pay cheque to fall back on. If you had NO extra money to save while they were working, I can guarantee life won't be much fun living on government benefits alone.

Studies show that the happiest people are those that learn to both SAVE and SPEND. For most people, it is very easy to spend – and save what’s left. That all sounds great in theory, but very few people end up with anything left to save. Why is that? Because there are WAY TOO many things to tempt you and your money. And it has NOTHING to do with the amount of money you make – THERE IS NO LEVEL OF INCOME THAT YOU CAN’T OUTSPEND. The reality is, there is a very small percentage of the population that are able to spend first and then save later.

The large majority will have a difficult time unless they learn to save first and then spend. The nice part of this plan is that you decide what you need in the short-term, mid-term and long-term and take those amounts out of your account automatically (the same day as you get paid), pay your bills and the rest is up for grabs. For me personally, this method took away any guilt I felt when I spent money. I took care of the future me first, paid my bills and didn’t worry about how I spent the excess (and sometimes there might not be a lot of excess, but you still get to choose how you use it - you can even be really foolish with it and not feel guilty).

You have to start somewhere, so don’t think you need all these pots in place at the same time. Start with small amounts as you are still working on creating a pain-free habit. Don't get carried away and try to save too much to start with - I've seen clients do this and not leave enough money to provide some enjoyment today. They typically get discouraged and give up on their plan altogether.

If a winter vacation is really important to you, then figure out how much you need and start putting that money in a savings account. If you can’t afford to save it all over one year, maybe you need to save for 2 or 3 years before you actually take a trip. Perhaps you are hoping to buy your own home within the next 5 years. As a first-time home buyer, you only need a down payment of 5%; so estimate what you might need and get that fund started. At this point, retirement is a lower priority so maybe that won't be your first priority. Now you’ve created your own “Pay Yourself First” habit, so you will just shift that money you were putting aside to something else on your list once you’ve satisfied the first “want or need”. Retirement won’t be a priority when you are young, but putting even a small amount away regularly at a young age will make a huge difference. We will discuss that further in upcoming posts.

Come back next week to hear more about investments – savings accounts versus GIC (guaranteed investment certificates) versus stocks and bonds.