Saving This Way Will Change Your Life
We, as Americans, suck at saving
Saving Is Important
Saving is important, most of us know that. But why is it so difficult?
I’m gonna get right to it.
Saving is difficult for most of us because it is business. We are constantly at war with ourselves over what we need, want or deserve. There is also the internal battle between whether it’s better to be gratified in the present or the future. The reason most people struggle with saving is because they don’t have a gameplan. They fight these battles every day without so much as a destination, much-less a road map to said goal.
Saving for a purpose
You need a war strategy against your own impulses. This strategy shouldn’t only protect your capital, it has to have a purpose. And, consistent with the mission of the Market Adventures Podcast, the purpose should be future investment.
Cash is crucial
Cash is a position. This is a term used in the financial markets but can certainly be applicable in all financial spaces. Whether it be stock market investing, real estate, or ecommerce, having that money ready allows you to take better advantage of opportunities as they arise. Our army of dollars will have a greater chance of winning the war against ourselves by having a plan and sufficient capital.
Saving is difficult for most of us because it is business. We are constantly at war with ourselves over what we need, want or deserve.
My Financial Gameplan
I’m going to give you a look into my financial breakdown, how I break down the finances for my family and how it plays into our future plans.
Saving is so fundamental to any type of financial journey, but it’s hard. Companies spend millions on marketing research to find out the best way to get us to spend our money. Entire teams study the psychology of the consumer and products are developed specifically to bring us back for more.
Here’s how I break down my family’s savings.
Find The Gap
The first thing I do is a gap analysis. This step is absolutely crucial. Just as important as it is to know where you’re headed, you HAVE TO know where you’re starting from and how far you are from your goal. You would never get on a boat that doesn’t know where it’s going. Make matters worse, you can’t get on the boat if you don’t even know where it’s launching from. How can you plan for a cruise to Jamaica if you don’t know where the ship is docked and how long the trip will take?
So, if in my gap analysis I say that I want to own a Tesla, then I need to know a few things: So, if in my gap analysis I say that I want to own a Tesla, then I need to know a few things: how much do I have now, what’s the cost of time and labor to get there, what’s the cost financially, how does it rank amongst other needs and wants. Do you want to own a Tesla but you also want to own a home? Which is more important to you?Do you want to own a Tesla but you also want to own a home? Which is more important to you?
Be Honest In Your Analysis
Be honest when describing your launching point. Whatever your goal is, your starting point can serve as a trampoline or slow you down like turbulence.
If I make $40,000 a year and I want to have $3 million in the bank. By the time I retire, what the hell do I need to do to get there?
If you don’t take a real look at that, you’ll never know what you can do tomorrow to get one step closer.
This gap analysis is not only important to know how far you are but also what you need to improve upon in your plan to get there. You can make six figures and be in a worse financial situation than someone who makes $60,000 or $50,000. Because financial management is so important, having an understanding of this baseline is essential.
Financial baselines are a window into your launching point. Many of your decisions in life actually start right here, whether you realize it or not. What does your pre-tax income look like? Are you making a hundred thousand dollars? After pre-tax income, outline your regular expenses.
Do you actually know what you are spending your money on?
Make a list of your pre-tax expenses, such as: rent, credit card, car note, car insurance. Do you have outstanding medical bills? We can go on and on, but you get the idea. After my gap analysis, I describe our family’s financial baseline starting with our pre-tax income and pre-tax expenses.
Income over Expenses
Here’s something you NEED to know and correct quickly if you’re guilty of it. Pre-tax expenses SHOULD NOT exceed pre-tax income. You can’t be in the red. You shouldn’t be in the red. If you are, that means you’re living in perpetuating debt, and this article cannot help you until you correct that.
And here’s the best way to correct this violation: decrease your expenses. Of course you can increase your income, but the latter is much easier for most individuals.
If we’ve successfully met the challenge of being in the green at the end of that, we need to discuss what comes next.
Saving To Grow Assets
Now that I’ve done that with my family’s income statement, we move on to the balance sheet. This is where the money works and sleeps. Working money brings money back into your asset column regularly. Money that sleeps in the asset column is there waiting to serve you later. There are many reasons to save, today we’ll consider just two: emergencies and investments. On a very basic balance sheet, you’ll find assets and liabilities. Assets are our money army and liabilities shrink that army.
Emergency Cash Account
For emergencies, we have our cap ex account. Cap ex stands for capital expenditures and is typically used in real estate to calculate future repairs consistent in the industry. These repairs include: roofing, foundation, plumbing, and other big projects. For my family, this exists to cover the big stuff such as: car repairs, health emergencies, home repairs, and other large expense necessities.
We must acknowledge that life is unpredictable and it’s better to be prepared for a disaster and not have one, than to be surprised by a disaster and not be prepared. Being a father of two toddlers, this account is an essential part of our game-plan. This money goes into our Cap X account and we don’t touch it, it’s off-limits for any other purpose than emergencies.
If there isn’t an emergency, you just let it grow. Aside from the Cap X savings, you want to have rainy day savings as well. This account is for minor expenses that were unexpected. If you need some toilet paper or something.
Life is unpredictable and it’s better to be prepared for a disaster and not have one, than to be surprised by a disaster and not be prepared.
Investment Cash Account
Enough with the emergency savings, now let’s talk investment savings. This is the other side of finances that many Americans never consider. This is the side that gets you over that gap you identified in the gap analysis. There’s nothing like having cash sitting in your asset column when you’ve found an opportunity to move you closer to your financial goals.
Saving For Financial Freedom
Financial freedom account, that’s what I call it. This is the account where we grow our cash army. We build for an attack, to seize an asset that will pay us for owning it. Assets come in all shapes and sizes: stocks, crypto, real estate, NFTs, etc. to get ready to strike when the time is right.
Best Savings App: Digit
Shameless plug; one tool I’ve been using religiously for years is an app called Digit. This app allows me to create separate wallets, goals and saving frequencies for all of our goals. Every time we get a paycheck I put aside money manually, but funds are also pulled and saved automatically based on the plan I set forth.
The rainy day account has come in handy hundreds of times over the years. I have it set to take out money automatically whenever I make a purchase with my card. Later, when I need to spend petty amounts on small items, that money is ready to be used. Hopefully you never need it because you’ve taken care of your pre-tax income and your pre-tax expense column to a point where you have some discretionary income that you can use for miscellaneous coverages. But that rainy day account is there in case you’re in a pinch.
Saving with Multiple Accounts Is A Must
It just makes sense to have multiple accounts where you’re holding cash for defined purposes. Having one account with a large sum of money and no details to what dollars are allocated for, that’s a risky bet.
You don’t want to have 3, 4, 5, 10 grand in one account that has no specific purpose, nor do you want one account to have a list of a bunch of different purposes. Money needs discipline, because if you’re not disciplined in separating the accounts there are too many scenarios where that money disappears.
Scenario With One Savings Account
Here’s a scenario: you have this savings account, and you have to buy some little things around the house, so you dip in. Then, you’re getting a routine oil change and your mechanic tells you that you need a new radiator. It sucks, but you gotta do it. You dip in again. The account is still healthy, until you get food poisoning on a night out and miss a week of work. Missing work makes you lose some of that money you get on your check, and you have a small hospital bill to pay.
All of this is no big deal, until the realtor calls you about the investment property you were looking into and it just became available. You look back at your account and you’re about 1 or 2 grand short of the money you needed to buy the property. Somewhere along the line you took a piece of that money you put aside for it and now you can’t buy that asset.
You’re not ready to strike.
This may not sound like a big deal to someone who doesn’t have an end goal in mind. They might be thinking, “so, what? Just save up and get the next one.” But for you and I, hungry investors seeking financial freedom, that throws us off our course.
Seeing that fat stack sitting there creates this false sense of security and tempts us to dip in when it’s not necessary.
Other Ways To Save
With these accounts, you can also convert your cash into other assets as you wait for investing opportunities. If I had $10k in cash, holding that in the form of stocks could be beneficial. I wouldn’t recommend having your investing army stored in real estate because to liquidate real estate takes a lot longer of a process than it does to liquidate stock. Real estate is a fantastic asset that can pay you consistently, but it’s a poor asset to store capital you may need in a short timeframe.
Knowing where you are now and how to get to your destination is crucial to the journey. That all starts with that gap analysis. Begin by measuring your current monthly pre-tax income and pre-tax expenses, this is your income statement. It is absolutely imperative that you not be in the red. Figure out how to lower your expenses or raise your income enough that the income exceeds the expenses. The majority of your savings will be funded by your income. You will need to have enough left over after expenses to live comfortably and fund your future.
Make sure you have a game plan for acquiring assets and growing your cash army. Of the ways to hold that cash for a future investment, stocks and cash are the best. Because Stocks liquidate more quickly than most other assets, they are better stores of capital in the short-term.
In addition to saving for investments, having an account to cover major disruptions in life is also critical. Life is unpredictable. Tomorrow you could need new tires or a new leg, God forbid. Set that cash aside, away from your petty cash and investment army so you can deal with life’s surprises.