How to save properly to build wealth
Proper spending will lead to proper savings
QUESTION: What is the first thing I need to do to build my wealth? I earn well but I also spend a lot. —Asked by David via Facebook
ANSWER: Well David, a lot of emphasis has been made toward growing your wealth by investing it, something I totally agree with. Investing properly can maximize your savings and when properly undertaken, it should amount to something substantial in the future. A simple answer is this, start saving first!
However, the issue on saving money has always been relegated as something that is so basic that it is assumed that everyone knows how to save. But do we? Us Filipinos continue to have very low savings despite that drastic improvement of the economy and our income. In my travels to teach Filipinos not only here but abroad, I am a witness on how low our savings are and how little emphasis we put on savings. When you ask people if saving is important, everyone will agree with you that it is. However, their bank accounts will say otherwise.
Why is it so hard for us Pinoys to save? The culprit is the way we spend. Unfortunately, we have developed a liking toward too much consumerism that many of us have developed a spending problem. People do not save because they spend more than what they should. I know that it may be an overly simplistic statement but that is the hard truth! While I agree that many of us are finding it difficult to save because of low income, there are also many of us with above-average income who still find it difficult to save.
Proper spending will lead to proper savings. When we take charge on the way we spend, savings will automatically follow. Not all spending are the same and we often hear about needs and wants. Yes, that is a very basic concept but it is truly fundamental. Spending on needs is hardly pleasurable – do you know anyone who is excited paying his or her bills? However, spending on our wants will always give us the warm fuzzy feeling inside, even if it is momentary. Without proper control, our spending on wants and not on needs often causes us a lot of financial problems and in most cases, it can cause us to be in debt. The other problem with spending on wants is that it is insatiable, we will never be truly satisfied so we end up spending more.
Here’s a simple tip to get those spending in check — create and stick to a budget! Again, an overly simplistic approach to personal finance but it is so important that the foundation of all our financial goals should start with our ability to control the amount of money that leaves us. A budget will do wonders to our financial future because if we are aware of our spending, we can control it better. Noted personal finance guru Dave Ramsey says “before spending paper, spend it on paper.” That’s what budgeting is all about. It is best for you to identify your expenses and start allocating for them properly. Include your “want spending” in your budget too because everyone needs to spend on something that will give us that warm feeling inside, too. Just make sure that this want spending has a limit and that you do not go over that limit. If you like to automate your budgeting, you may want try the app called Good Budget (formerly known as EEBA), available for free for iOS and Android users.
When you know how much you need to spend, including your wants, you can save better and more consistently. When preparing your budgets, make sure that there is enough money left for savings. You can use a certain percentage as a minimum for savings, like 20 percent of your income and build on from there. A good ideal target for a savings rate is 30 percent of your income — a formula that will guarantee you wealth in the future.
For those of us who have a difficulty of setting aside an amount of money for savings regularly, I suggest you enroll in an auto-debit arrangement with your bank and make sure that you do not touch that account, otherwise your savings will not grow. When you have built up enough savings, which you can also use as your emergency funds, you can now begin to invest your money to build on your wealth.
Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it. – Proverbs 21:20, ESV
Randell Tiongson is a Registered Financial Planner of RFP Philippines. He is one of the most sought after speakers in Personal Finance and Columnist of Philippine Daily Inquirer and Money Sense Magazine. He is best selling book author of Personal Finance Step-by-Step Guide.
Source: http://business.inquirer.net/176999/how-to-save-properly-to-build-wealth
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