It’s fun to spend money, and, as one of the core principles of economics states, human beings have unlimited wants. So the big challenge in life is maintaining a balance between saving for things you want to buy in the future, and spending on things today.
As certain reality TV shows reveal, most people are really good at spending but not very good at saving. Their approach to finances and budgets is to set a goal that, as of next month, they are going to begin to spend less and save more for the future.
The first of the month rolls around, and they begin to keep an eye on their bank account. They see their bill payments come out, and they commit to taking whatever funds are left over at the end of the month and allocating those toward their retirement plan. Throughout the month, they try to watch their expenses, but amazingly, by the 30th they are only able to get the bills paid.
The net result is no additional funds for savings. They then set the same goal for next month, and the cycle repeats. A few months later, they feel really frustrated that they are making little progress. So, in an effort to feel better, they invest in some “retail therapy” and enjoy a weekend shopping spree on their credit card! They then struggle over the next few months and scrape by to pay it off. The net result is an overall feeling of frustration and no progress toward their savings goal.
This is further complicated when owning a business. The combination of volatile cash flow and the constant need to reinvest in core business needs such as staff, technology and marketing do not make things any easier. This can lead to feelings of even greater frustration and even thoughts questioning the viability of the business itself.
Pay yourself at the start of the month
A simple solution, instead of trying to “pay yourself last” at the end of the month with whatever is left over, is to “pay yourself first” at the beginning of the month—before everyone else gets their hands on your cash. This means having money automatically routed at the beginning of the month to a designated savings vehicle. This works great personally or inside of your business. If you can allocate a percentage of your income into savings this way, it will shock you to see how you can still get your bills paid every month despite having a bit less money to do so. Setting up payments to be automatic is the key!
This can be done in a number of ways:
1. Automatic transfers from your chequing account to savings or extra payments to credit cards, through online banking or telephone banking.
2. Pre-authorized withdrawal programs with investment or retirement savings providers.
3. Extra mortgage/debt payments by contacting your lender and requesting they increase your regular payments (even $100 monthly can make a big difference over time).
4. Payroll savings plans. This one is really easy; your payroll service withholds a portion of your paycheque and directs it towards a savings plan before it hits your bank account.
The great thing about many of these automatic savings vehicles is that they are flexible and can be increased or decreased any time. So if you have a very profitable quarter, adjust your transfer to be a bit extra for a couple of months. Or if your business is seasonal, turn off your savings plan and restart it a few months later.
How much to save
Everyone wonders what the “magic number” to save every year is or “How much do I need invested to retire?” This is truly an individual question, as there are so many different scenarios and goals. For advice tailored to your own circumstances, speak to a qualified financial planner.
A rule of thumb I typically use with my clients is to save 10-20% of your income every month. For me personally, this is what I strive to do….some months more successfully than others. Of course, 20% is a fairly large percentage if you are not accustomed to this type of investing. It’s no different than exercise……if you are not habituated to regular exercise it’s tough to jump off the couch and run a marathon. So, start nice, easy and small: possibly 3% or 5% of your income. Set a goal to increase by 1 or 2% every few months. A few years later you’ll look back and have a nice chunk of cash set aside! Remember, every little bit counts.
In the event you need additional assistance in simplifying your life, we have developed a free report that identifies implementable tips that you can act on immediately to begin simplifying your life. Visit www.simpleplanreport.com to download today!
Have a fantastic day and always remember to keep things simple!
Mark Landers is the creator of The Simple Plan Program and has been helping entrepreneurs simplify their lives for over 10 years. He can be reached at Mark R. Landers, CFP CHS, The Northridge Financial Group Ltd. at 416.705.6640 or mark@nrfg.ca.
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