Wealth Building 201 – Saving

Now that we’ve discussed getting a handle on your finances we’re going to switch gears and talk about a more positive facet of wealth building – accumulating wealth. The first step to that is saving.

One could argue you should be all caught up on your budget before you start saving and they would be technically correct. However, there is an old saying in the personal finance business: Pay yourself before you pay your bills. This is where the rubber meets the road in building wealth. I would argue that regardless of your financial situation, it’s important to start saving immediately. The amount you save doesn’t really matter so much, at least not in the beginning --- it’s all about building the discipline. It’s important that you recognize the importance of putting money back and having the discipline to not dip into it when times get tight.

Many folks break saving into three types: Emergency, Short Term, and Long Term. You may find some variation on that makes better sense to you, but nonetheless in order to be successful at wealth building you need to recognize the importance of all three and build them into your financial plan.

With respect to emergency savings I recommend that you define up front what an “emergency” would be for you so that you’ll know when it’s OK to use it without feeling guilty. In my opinion it should be pretty dire circumstances that would lead to even deeper financial problems if not dealt with, for example car repairs -- if you lose your car you can’t get to work!

Short term savings would be for things that you know will come up eventually and want to be prepared for it. It really helps to have a specific thing in mind (e.g. vacation, new tires for the car, a new car, etc.)

Long term savings would be something along the lines of retirement, college for the kids, or other things that might have a time horizon greater than 5 or 10 years. This type of saving is appropriate for investing which I will cover in future segments. Emergency and short term saving is more appropriately done in cash, money markets, or in some instances certificates of deposit (CDs).

I suggest that even if your financial situation isn’t where it should be you can start small and you should start the habit of earmarking (perhaps even open up separate accounts) your savings for all three types outlined above. One thing that helped me in the beginning (many, many years ago) when I was trying to get started was to open a savings account that I knew would be inconvenient to get money out of. Then I took a look at what I was willing to put back each paycheck and set up automatic withdrawals from my checking account to fund it. It may sting a bit when you first get started, but as long as you’re realistic about what you’re going to save, the pain will soon go away and you’ll forget that the money’s going there.

In addition to building a discipline, another good thing about starting small is that having only small amounts going to savings might keep you from being too tempted to dip into at first.

Assignment: Think about the three types of savings discussed above. Put together a savings plan that will work for you and commit to it. Even if you have to put the cash in mason jars at first till you get enough to open an account, the discipline you build by doing that will serve you well in the future!

For the next few segments we will be discussing investing. To me, this is the most exciting and rewarding part of wealth building.  I hope you'll join me for that.