It's not our income..it's what we spend

Savings is putting something away for tomorrow. Setting aside some of our resources now, gives us that extra edge in riding out the challenges that may beset us. It will be our financial cushion. One of the most important fixed expenses is savings. Regularly saving a portion of your salary is the smartest financial move you will ever make. You should aim to save ten (10) percent of your take-home pay.

        Pay yourself first is regularly setting aside money for savings, even if you’re short of money. Simply, each month, you have to allocate money to your asset column before you pay the monthly expenses. Then, after paying yourself first, the pressure to pay utilities or creditors is so great that it forces you to seek other forms of income. The pressure to pay becomes your motivation. Thus, it made you work harder, forced you to think, and made you smarter and more active when it comes to money.

Paying yourself first is not get into debt in the first place. When you come up short, let the pressure build and do not dip into your savings or investment. Use the pressure to inspire your financial genius to come up with new ways of making more money and then pay your bills. You will have increased your ability to make more money as well as your financial intelligence. The rich knows that savings are only used to create more money, not to pay bills. You should also aim to have a savings cushion of three (3) to six (6) months of your living expenses. This is an emergency account, in case you or your spouse is unable to work or you otherwise suffer a disaster.

        How to get starting saving:

• Keep a simple record of where your money is going.
• Make a commitment to learning ways to manage your money better.
• Slow down your spending.
• Learn that not everything that’s fun costs money.
• Set aside your savings at the beginning of the month, not at the end when there may not be much money left.

As aptly said by David Bach, author of financial bestseller book, “The problem is not our income …It’s what we spend! The reality of life is that just about everyone makes money to be wealthy. So why aren’t we all rich? We waste a lot of money. We simply waste a lot of it every day on “small things.” So-called “small things” can add up very quickly to some amazingly large amounts. Someone said sipping a cup of coffee in Starbucks is only a “small thing” expense. But when we added it all up, the total became a “big thing.”

The point here is not that you should stop drinking coffee or even stop going to SM malls or Trinoma. I happen to enjoy malling too. The point is that here we thought we couldn’t afford to save any money, and yet there we are spending more than on extravagances. The math is really quite amazing. If your age is about 35 years old (it should read “young”), saving just P10 a day (excluding weekends) amounts to roughly P200 a month, or P2,400 a year. If we put that much into a retirement account that earned an annual return of 12%, by the time were 65, we will have a nest egg of more than P2.3 million!

The “nest egg principle” was taken from a scriptural principle: “He who gathers money little by little makes it grow.” (Proverbs 13:11) That’s right. Pick any income level you want, and then follow this simple plan: Each year of your forty-year career save 10% of your desired annual retirement income, put it into a retirement plan, and you can extend your targeted income in perpetuity. For those 50 years old and above, you don’t need to worry. You can catch up by saving more, earning a higher interest rate, or some of each or you can teach your children and “apos” about the nest egg. Teach them the habit of saving.

The requirement to earn a higher yield goes up disproportionately as the window of time narrows. That’s because the money is not available to compound over a large number of years. Obviously the chances of making double-digit returns require high risk and would be difficult to achieve. That’s why others engage in scam-related activities such as pyramiding to earn a higher return. Beware of it!

Financial success is a product of time, savings, and return. The formula is: Financial Success = Time x Savings x Return. The variables within the formula are listed according to priority. In other words, time is more powerful than the amount you save. The amount you save is more powerful than the return you get. Where do we tend to put the most focus? Your guess is as good as mine – return. People have a tendency to work these variables in reverse order.

Time is important. That is why time comes first in the equation. Start saving and investing early because in compounding, every peso matters, and compounding is nonetheless a wonder when it comes to building wealth and creating financial success. People who focus on return always get the opposite result. To increase returns, people become traders rather than investors. As they said, “Trading is hunting; investing is farming.”