If you want to build wealth, become financially independent, gain control over your time, and spend your days having your money work for you rather than you working for your money, you must master saving and investing. Anything you can do to make saving an investing easier is a victory because it accelerates your ultimate arrival at the life you envision for yourself. Saving the first $100,000 is the most difficult part but once you get beyond that threshold, things get a lot easier because your money starts to compound for you as your dividends, interest, and rents pile up.
To help you understand some of the things that I think are important when it comes to saving and investing money, I’ve put together a quick list with my thoughts on why each item matters.
1. Keep Perspective. Saving and Investing Are Important But They Are Only a Means to an End
Your investments and savings are ultimately a means to an end. The value of your portfolio rests in the enjoyment and security it provides for your family. This is often the reason normally rational individuals behave irrationally when it comes to their stock holdings – they secretly view each up and down tick as feast or famine. It’s foolish; nonsense. Money is a tool. Nothing more. Nothing less. It exists to serve you and accomplish whatever it is you want it to accomplish for your life, be it making you more comfortable, giving you control over your career, living in an area you love, giving your children and grandchildren a head start in life, or being able to pursue a passion that you otherwise would not be able to afford.
The moment you begin to prioritize saving and investing for its own sake, you’re probably going to make bad decisions and miss out on some of the most valuable experiences in life. For some people frugality becomes a type of sickness; a religious-like asceticism that enslaves them to the debits and credits on their personal ledger.
2. Saving and Investing Becomes a Lot Easier When You Step Off the Consumption Treadmill
On a related note to the last item, just as you can be too parsimonious, you don’t want to turn into a total profligate, unable to deny yourself by choosing what you actually want over your short-term desires. Moderation is the key. Prudence and temperance is the secret. In the same way consuming too little or too much food or drink can cause misery and death in the body, so too can hoarding or squandering capital in the soul.
You probably know what I mean. You see people who always have credit card debt; who always need a new car even if they can’t afford it. They go through life making a good living but hardly ever able to scrape two pennies together unless they’re promising to sell future hours of their life (which is what happens when most people borrow money – you’re quite literally agreeing to give up some of the 27,375 days you’ve been given if you’re a perfectly average person plus interest, in many cases). To add insult to injury, these folks hardly ever think about lifecycle costs or economies of scale. They could live so much better than they do if they were only intelligent about it but impulsiveness wrecks any hope of that.
If this is an area with which you struggle, I’m a fan of a behavioral psychology tool called “gamification”. Effectively, you take the rules, rewards, and mechanics of a video game, board game, or other game and apply it to your personal economics. You make it a personal challenge to find ways to purposely cut expenses by $100 a month and move it into savings, instead, walking home instead of taking the bus or skipping ordering a glass of tea with lunch, requesting water, instead. It becomes its own reward system. There are numerous phone apps, tablet apps, and software programs these days that can do it for you, even allowing you to create avatars that level-up at pre-determined milestones.
It’s worth it. You must master this if you have any hope to enjoy life. You can never experience financial freedom until you have stepped off the consumption treadmill.
Once you slip into the habit of borrowing tomorrow’s income to pay for today’s expenditures, you will begin to loathe money and possibly even your job or occupation. Instead of viewing it as an outlet for your talents, gifts and ambitions, it becomes a series of endless tasks you must complete if you hope to break even at the end of each month.
3. Saving and Investing Money Becomes a Lot Easier If You Setup Auto-Withdrawals from Your Checking or Savings Account
Many brokerage firms allow you to set up regular deposits by electronically transferring money from your checking or savings account each week, month or quarter. This is a very effective way to begin saving because you don’t actually see or miss the cash as it is moved directly into your brokerage account. On the same note, if your employer offers an automatic withdrawal option for your retirement account, you may want to consider joining.
4. Educate Your Mind. The More You Know, the More Excited You Get About Saving and Investing Because You Realize You’re Buying Yourself Freedom
There are hundreds of excellent finance, investing, economics, accounting, business and management books in the world. A few hours of well-directed reading each week can have a fattening effect on your pocketbook as well as give you something to talk about with your friends and family. One small example is how fun it is to see the world through the lens of creating passive income; of measuring your annual success through the level of passive income you generate each twelve months. Another is learning how you can get paid in exchange to promise other people you’ll buy a stock you wanted to buy, at a price you wanted to pay. It sounds crazy but it’s true.
Consume knowledge. Amass wisdom. Be a learning machine, always adding to your arsenal of practical, applicable strategies and techniques. A few good ideas spread out over a lifetime, intelligently implemented, can mean all of the difference.
5. Saving and Investing Money Is Easier If You Reward Yourself from Time to Time
Clipping coupons and reducing household expenditures does not mean you have to live the life of a miser. Once you’ve established your personal investing goal, reward yourself for reaching specific milestone. Perhaps take a vacation once you cross your first $100,000 in savings. Maybe allow yourself to buy a lake cabin when you pay off all of your debt and have a solid emergency fund; a place where you, your children, and your children’s children will spend summers. Figuring out how to space rewards with goals that cause you to reach, to deny yourself just enough to be uncomfortable and the accomplishment truly is a personal, emotional victory, may take some time but it is worth it.
Positive economic incentives can do marvels for productivity, and you may not find it nearly as difficult forgoing current consumption if you know a new pair of Allen Edmonds is in your future. Besides, when you associate a luxury good with an accomplishment, it has much more meaning and value.