The No. 1 factor for wealth success?
Systematic saving is the key to financial destiny; try to stay with it as income increases
My last “Money for Life” column (thespec.com, February 16) offered a handful of options for a young reader just starting in her career and looking for strategies to plan for an early retirement.
Let’s presume she has implemented my basic strategies, which included having a source of earned income with the opportunity for career advancement, keeping costs low for food and housing, not incurring debt, improving the investment rate of return and an early start in planning and saving for retirement.
Now I offer the single most critical strategy for creating wealth.
The greater the spread between your income and your expenses, the greater opportunity you’ll have for a comfortable retirement, or even to retire early. But it only creates the opportunity, not the guarantee. That is, to build wealth you must be disciplined about saving your surplus money. And those savings must be invested to continually enhance the pot of cash from which you can create an income stream down the road in retirement. Your savings plan will have the most significant effect on your chance at financial success.
Saving is a matter of habit. And the best way to develop this habit is to save each and every time that you earn income. The key to wealth is making sure that the strategy is systematic; that is, set yourself up to save automatically, without having to think about it or act on it every time you get paid. The most effective saving habit occurs without ongoing direct involvement from you.
To make saving a regular habit, simply set aside a certain percentage of your paycheque, as soon as you earn it. For example, you could save, say, 10 or 20 per cent of your paycheque, as soon as the money lands in your bank account. Don’t wait to save it at a later date – that’s too risky, because some other expense will absorb that cash before you have a chance to sock it away.
Here’s the trick, in this order: earn money, save money, live on the rest (without incurring debt to do so). Simple, but effective; the road to financial success is paved with the habit of systematic savings. And, as your career advances and your income increases, if you maintain the same percentage of systematic savings, the dollar amount of savings will also increase.
Again, income alone does not create wealth. Instead, the key is creating a gap between income and expenses.
This gap is then systematically saved and invested to grow the pot from which you will eventually draw in retirement, supplanting earned income with investment income at that point.
Like most people, you likely do not wish to physically earn income forever; you may wish to stop working some day, or decrease the time and energy devoted to working. To get in this position, during your working years you must systematically save to accumulate sufficient money in your investments, so that they can eventually produce the income you need to support your desired retirement lifestyle.
Don’t worry – you will be rewarded, and not only in retirement. Those savings will ultimately put you in a position of choice: the choice to enhance lifestyle, the choice to increase expenses, the choice to upgrade housing, and even the choice to stop working and saving and instead rely on the money you’ve invested to retire when you wish.
The wealth created from systematic savings is inevitable. Ultimately, investments create wealth, not earned income. Your saving plan is what gets you there and it is the most critical factor in your financial and retirement success. The good news is that you absolutely have control over it.
Your habit of systematic savings will determine your financial destiny. How wonderful to know that you can take such simple action now to guarantee your long-term wealth success.
THIE CONVERY, R.F.P., CFP, CIM, FMA, FCSI, IS A WEALTH ADVISOR IN DUNDAS, AND HAS IMPLEMENTED A SYSTEMATIC SAVINGS PLAN TO CREATE WEALTH FOR HERSELF. HER COLUMN APPEARS BI-WEEKLY IN THE HAMILTON SPECTATOR. THIE INVITES YOUR QUESTIONS AT THESPECMONEY@GMAIL.COM OR BY VISITING CONVERYWEALTH.COM.