Chapter 6 - Savings

Start Saving Money

When I first started at the job that I stayed with for 26 years, the senior administrators of it insisted that all of us young fools just starting up sign up to contribute to the corporate pension plan. The logic they gave us was that if you start paying right from the beginning, you would never miss it. If you are not allowed to touch it, then it will be there when you want it the most…when you are tired and worn out at the end of your working life.

I am in complete awe of how completely correct they were. If they were not so correct, I would not have time to be doing what I am doing at this moment. I am also in awe that they did this in economic times that were at least as uncertain as they are now. I am also thankful to them for having enough respect for me and my contemporaries to manage that plan with the highest level of diligence. There were economic ups and downs. There were those who tried to take our savings in a scenario much like that portrayed in the movie, “Wall Street”. Through it all there were those who always had a better idea and those who do not appreciate the level of diligence that has been applied to our collective savings. As I look at the youth heading into the workforce, I do not see a future for them like the one I had. They will be left to do this for themselves and hopefully they will listen to the wisdom that is available to them.

One of these bits of wisdom is that they must have a long term savings plan. One financial tool that should be in your toolbox is that you should know what constitutes an ideal budget. This is very similar to the form you fill out when you want a bank loan. You should have no more than 30% go for your housing, another 10% for your other financings and the rest should be for survival. Out of that 60% of your income, a percentage should be put into long term savings. You will never miss it and the financial power you will gain as time and the miracle of compound interest have their effect is amazing to witness as it builds. In the particular instance of retirement savings, the government actually helps you save by not taxing you on the money that you put into registered accounts for this purpose. They will allow you to save a percentage of your income but there is a cap on the percentage of your income that you can contribute. And this is in the highest tax bracket of your income. If we assume you are in a 30% tax bracket, if you save $1000, only $700 of that is from your 2-cent take home pay. The other $300 is from reduced taxes. You are going to lose that $300 to taxes anyways, why not lose it to yourself? You don’t really lose it either. You just defer getting it. Another nice thing about Retirement Savings Plans, no matter what country you are in, is that you save paying taxes on the interest gained while the money is in the plan. When you do receive it, you will have gained the tax free interest plus it is taxed in a low bracket when you do spend it in your retirement.

A lot of people have the attitude that these kinds of plans are not just for retirement. They are designed for retirement but are an extremely useful tool for those whose incomes may have huge peaks and valleys. The idea is that you are in high tax brackets during your peak years and you are in a low or no tax bracket in the low times. So you squirrel away your money when you are at the peak. The government gives you its share in the high tax bracket years. During the low times you can take it out of these accounts but in the lower tax bracket. You gain the difference between what you have to pay in the lower tax bracket and what you saved in the higher tax bracket. You also gain the tax-free interest income that you made on that money while it was in the registered account. You got to use money that you should have given to the government to help your self. You have got to like that. You have to remember to keep on saving for the long term and not allow yourself to drain your savings that are set-aside for your twilight years. One of the most disciplined efforts you will ever have to make is to take as little as possible of those long-term savings when times are tough.

Choosing how much to save also has to be weighed against your spending needs. In your youth and mid life years there are so many demands on your cash flow. There are things you can do when you are young and free that you cannot do when you are older and tied to responsibilities. If you don’t have some fun, you may regret it or cut loose at a time in your life when it is not appropriate to the point of being harmful to people you care about. If you have too much fun in your youth and do not plan for the future, you can leave yourself in an awful spot. If you work in your old age, I hope you would because you want to not because you have to. No matter what you do, you will find that you need the help of your children in your old age and it will help them to help you if you can be financially independent. That should help you choose sticking to your savings plan over indulging in consumer forms of immediate gratification.

There are other forms of long term savings that can also be used while building savings. The first is to build equity in your family home. You need a place to live so instead of paying rent you buy your home. While you raise your family, you pay down the principal on the mortgage. When you retire you may not need or want the big family home and you can downsize to smaller and cheaper accommodations. By doing this you either eliminate or have already eliminated all of your mortgage debt and the corresponding cash draw of rent or a mortgage. If you buy a cheaper accommodation and have money left over, you can invest it in income producing investments to give you even more cash to live on. This makes much more sense than pulling the equity out of your house and spending it on consumer items. Similarly, you can build equity in your business. If you run a small business that has stability in its capacity to produce cash flow going forward, it has resale value. The business may buy property or may require a property to operate out of. That property should gain value over time. If the business is run properly, it should reduce debt over time and store value for the owner that way.

The question now is which way should I use to do my long term saving? The answer is to at least do 1 but do all 3 if possible. Diversity is the key to economic survival and you should do as many as possible. Remember you have a lifetime to save so if you only build little bits of equity at a time, it will compound. It is hard to find money during the busy years but you will be so happy that you saved when you are finished and ready to reward yourself in retirement. Those little bits that you save at those times will grow to more than you ever expected.

There is also short-term savings and it has its own set of goals and ways of improving your lifestyle. You have things you want to do and things you want to have. Here is a really interesting concept to pay for them. Save up the money first and then buy the big ticket consumer items you want with the cash you have saved up. Most businesses love cash. The phrase “You can pay me now or you can pay me later” brings forth appropriate images to illustrate this point. Finance plans and credit cards cost money to administer. If you save up so that you pay the total amount for an item in cash, the first thing you will usually be able to negotiate is a break on the price. The first thing that the business owner will gain is that he does not have to pay the vendor fees to the credit card company. These are usually in the form of a monthly fee plus a percentage of every sale put through that credit card company. It may only be 1% to 3% but ask for it. If you don’t get it you may want to reconsider your purchase. You may get that item somewhere else where the owner of the shop may be more willing to share the savings you have created for him. Remember you are working with your take home pay so a penny saved is 2 cents earned. If you save $15 on a $500 item, that is $30 that you do not have to earn to pay for NOTHING!!!!! You also save by not paying interest on the credit card debt that you may incur and gain the little bit of interest that you may make while saving up your money for this item.

Like long-term savings, you need to engage in a little self-discipline to get this cash pump primed. You can set aside a percentage of your spending budget to go into savings as a routine. Another way to start the savings process is to save all of a windfall. Then you keep adding to it with the money you have set aside in your budget. You wait for the product that you want to be available in one of the constant “SALES” that are used for hype in the retail industry. By saving and managing your money properly, you get control of “impulse- buying”. You save so much money by not taking the bait set out by advertising and hype. You also get what will really satisfy your emotional needs and you will have personal satisfaction of knowing that you did it right.

You can have different accounts for different things that you want to save for. You can have one for your fun spending. Another account that you may want to set up is a “Vacation Account”. You want to go on a vacation to relax. There is nothing that takes the relaxing feeling achieved from a vacation than the arrival of the unpaid bills when you have returned. Prepaying for a vacation not only increases your enjoyment while on it but makes the feeling last longer when you return.

Once you have mastered the pay me now approach to managing your emotional needs, you will find that you can actually address more of your wants and needs because you are getting full value when you pay for the things you want. This should make you a happier person. You can grow and you will find yourself able to do things that you never thought you would be able to do. It is one of those circular thoughts. By saving up and paying cash for 3 things that you want, you can buy a fourth item with the extra money you would have spent on the first 3 things using the old pay me later method.