The Complete Beginner's Guide to Saving Money

Tips to Make Wealth Building Enjoyable

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.

You will 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.

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. On the same note, if your employer offers an automatic withdrawal option for your retirement account, you may want to consider joining.

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 at your next cocktail party.

Clipping coupons and reducing household expenditures does not mean you have to live the life of a miser. Set financial goals and reward yourself when you reach those goals. 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.

Money, like water, expands to fill the container in which it is placed. If you lack an objective set of financial goals for your life, you probably reach the end of each month and find yourself broke. You vow that next month will be different, but it never is.

This scenario is certainly one with which millions of people can identify. Fortunately, it doesn't have to be that way. One of the most powerful and effective strategies for building wealth is to pay yourself first.

When you set down to pay your bills, the first check you write should be to yourself. Decide on an amount you can commit to for at least six months and immediately pay that "bill" by depositing the money into your brokerage, mutual fund, or retirement accounts. You must do this even if you cannot afford it! Then, pay your other bills as usual. If you find that you do not have enough money to cover all the expenses, write down the amount you are short and then find away to raise the money. If this means you have to recycle cans, switch to an off-brand cereal, work a few extra hours, or cancel your magazine subscriptions, do it.

Think it sounds too hard? If so, you must answer this question for yourself: is the pain of giving up your "perks" greater than the pain of being in financial bondage? If it is, you need to resign yourself to remaining in the same financial situation for the rest of your life. In fact, if you are prone to using debt as a means of upgrading your lifestyle, the problem will probably grow worse with time.

Taking control of your finances creates a sense of empowerment that will reach into every area of your life. The freedom that comes from knowing that you and your family will be provided for regardless of what may come up cannot be expressed in words. It is something you will experience for yourself when you make the decision that being financially independent and secure is more important than impressing your neighbors with material goods.

Once most people have given their word to someone, they are careful to keep their promise. They have no qualms, however, about lying to themselves. In order to be successful, you must honor your commitment. You cannot cut yourself any slack. As soon as you miss one "payment", odds are, you will miss another, then another, until you have stopped saving altogether. The secret to success in this game is not so much the amount of money you are investing, but the persistence with which you are doing it.

Before you begin on your journey to building wealth and finding financial independence, it’s important you understand a few basics. One of the big keys is that saving and investing are two related, but independent, processes that you shouldn’t confuse. A disciplined investor could find himself with dozens of real estate rental properties but unable to pay his bills if he didn’t appreciate the balancing act between the two foundations of success.

Perhaps the best place to begin for new investors is to define the difference between saving and investing.

Saving always comes first. Think of it as the foundation upon which your financial house is built. The reason is simple - unless you inherit a large amount of money, it is your savings that will provide you with the capital to feed your investments.

There are two primary types of savings programs you should include in your life. They are:

Only after that these things are in place, and you have health insurance, should you begin investing (this really is vital – for more information on why, read Investing in Health Insurance – One of the First Lines of Defense for Your Portfolio. The only possible exception is putting money into a 401(k) plan at work if your company matches your contributions. That’s because not only will you get a substantial tax break for putting money into your retirement account, but the matching funds basically represent free cash that is being handed to you on a silver tray.

For more information about how you can begin saving money, read The Complete Beginner's Guide to Saving Money. It is filled with articles, resources, essays, and lessons about how to save money, how to invest money, and how to get started on the road to wealth. It may seem daunting now, but every successful self-made person had to begin by earning money, spending less than they earned, taking those savings, and putting them to work in projects that threw off dividends, interest, and rents. They are no better than you are. If you learn the same thing, and can act as rationally so as to manage your money with discipline, you can enjoy the rewards of success, just as they did. In the end, saving money comes down to simple math. It really is as fundamental as 2+2=4.

One of the most frequent questions new investors ask is this: how much should I be saving for investment? Although the question is straightforward, the answer is not so easy because it depends upon a handful of factors. Let’s take a look at the questions and then we can tackle each one individually. Before we begin, though, it's important that you understand the difference between saving and investing. To learn more about this and how you should approach both, read Saving vs. Investing - Finding the Right Balance.

How much money would it take for you to live the way you want? Would it take $50,000 per year? $150,000? Perhaps $500,000. Back out any income you have from your job (if you don’t want to work, skip this step), and any other income you may have. Then divide the figure by .04 to find out the assets it would take to support that level of annual income. (Why .04, you ask? Many financial planners calculate that an investor could withdrawal 4% of their money each year and the account would still generate enough, over time, to maintain its current value after adjusting for inflation.)

An example might help. Let’s say you want to make $80,000 per year to live the way you want. You only want to work part-time and figure you can make $20,000 per year. You expect to collect $15,000 per year in Social Security. You would take $80,000 - $35,000 = $45,000. Then $45,000 divided by .04 = $1,125,000. That’s the amount that would be required for you to earn the other $65,000 from your investments and never run out of money.

Now, you need to figure out how soon you want the money. Let’s say you are 35 and you want to retire at 65. That gives you 30 years. Using any one of the thousands of savings calculators online (check out this one from Bankrate, for instance: Savings Calculator), you can plug in your numbers and figure out what it would take in terms of monthly savings to reach your goal. Assuming you can earn 8% on your investments, it would require $754.85 put aside each month until you retired. (If you started at 25, instead, it would take only $322.26 per month due to the power of compounding. If you started at 18, it would only take $181.09 per month.)

If you don’t want to leave anything to your family, friends, or charity (a charitable remainder trust can be a great choice for investors), the savings figures would be much lower because this model assumes you maintain the $1,125,000 fund in perpetuity. That is why you’ll see many financial planners estimate your lifespan. They’ll actually design a program so that your money runs out at, say, 85 or 90 years old.

You can reach your goal much faster by saving more each month. Whether or not you can accomplish that will depend on how much you are willing to sacrifice. Even an extra $300 per month can mean arriving at your savings goal years, or perhaps even decades, earlier than you otherwise could. Is that worth driving a used car or not ordering anything but water at restaurants? That depends on your priorities and no one can answer that question for you. I addressed this in The $25,000 Bouquet of Roses.

Several years ago, I made a commentary about the situation in Detroit. Given the skyrocketing unemployment, poor job prospects, and unfavorable demographics of the area, I was asked what I would do if my family were in the city. My answer: Move. I’d pack everything we owned, find a more favorable economic climate, and move there. The odds of catching something (in this case, a high paying job and good schools for the kids) would be much improved by casting my line in a pond with a lot of fish.

A handful of people responded strongly that I was completely out of line for suggesting that families uproot themselves. I’m not sure how to say this politely, so I’ll just put it out there: If you aren’t willing to inconvenience yourself for the chance at a better life, you better learn to be content with poverty. That’s all you’ll ever have.

In my own life, this was a decision I made early. Unlike virtually all of my friends, I refused to buy a car until I was more than 23 years old because as a teenager, I realized they had huge ongoing costs in the form of gas, insurance, and more. It took discipline (and certainly wasn’t always pleasant), but when I finally did by my first vehicle shortly after graduating college, it was a beautiful Jaguar that I got at an incredibly attractive price. At the time, I had little to no debt, my taxes were paid, and I had built a substantial investment portfolio thanks to working my way through school. My saving and investing had paid off, despite having to put myself through college. My friends lacked patience, wanted instant gratification, and bought their cars at 16 with auto loans that charged interest.

The rule of thumb can be summarized as the more you are willing to give up today, the faster you can reach your savings and wealth goal. One warning: Do not take this to the extreme. As famed economist John Maynard Keynes pointed out, “In the long-run, we are all dead.” Money exists only to allow you to have the kind of lifestyle you want and open doors of opportunity for your family. As my father told me before he and my mother left me on the college campus all of those years ago, never trade an opportunity or experience for money because it will be a poor bargain. I certainly did not live like a pauper (far from it). Most of this was possible because my early discipline allowed me to avoid the massive interest charges most Americans pay on their homes, credit cards, cars, student loans, department store charge accounts, and more.

You can use the same calculator from earlier in the article to increase the savings amount you are willing to put in each month. It will generate a new answer, showing you how soon you will reach your goal. In the case of our earlier example, the 25 year old that was willing to kick in the extra $300 per month would be able to retire on schedule at 57 years old and 10 months, or nearly 7 years and 2 months earlier than planned. Is that worth it to you? Is giving up $300 a month worth an extra 7+ years of retirement? Again, only you can answer that question.