Sunday, March 23, 2008

a very simple move

Back in August of last year in my 'how i manage day to day' post I explained the habits that I employ which I feel allow us to save about 40% of our net income. I wanted to expand on #4 on this list which was 'MAKE SAVING YOUR FIRST PRIORITY'.

Actually making saving your first priority for your money is not an easy task. Life is filled with ways to spend money and often these seem more attractive than saving and investing for the long term. Changing your mentality to see the long term benefits of saving and investing is a state of mind, and is not accomplished overnight by most. The benefits of saving and investing a large portion of your income are numerous. It is important to remember that having the wherewithal in the future to purchase material possessions is only a part of the benefit. Another part, which some might consider the key part, is financial security and freedom. By financial security and freedom, I am referring to that mental state of mind where money no longer becomes a constant stress and worry in your life. I think many people overestimate the amount of capital that it would take for them to achieve this financially free state of mind. If you have the choice right now at this moment whether or not you want to stress about money for the rest of your life, why choose stress?

Literally making saving your first priority is an extremely easy task. Blogger squawkfox points this simple fact out best in the post 'I have zero debt. Am I weird?'. When I read #7 of squawfox's list, 'MOVE THE MOOLAH' I realized how important this is. squawkfox and I share this habit as one of they key's to our saving strategy. It is so simple it's almost silly, but I hold 'MOVE THE MOOLAH' as absolutely essential to saving 40% of our take home pay. It is as easy for me as the following robotic procedure I go through once every two weeks or so:

My 'MOVE THE MOOLAH' Procedure
  1. Get Paid (X). This is where the money comes from.
  2. Sum up your expected expenses for the next 2 weeks (Y). If you need help look back at your spending from a previous 2 week period.
  3. Insert Buffer. To allow for the unexpected, include a small amount of money (Z) in your expected expenses.
  4. Perform this calculation $X - $Y - $Z = $S (Savings)
  5. Simply transfer $S into some type of savings or investing account. Usually this involves typing in dollar values, and clicking a few times.

I really only started doing this habitually about 2 years ago, but it has really paid off. It seems that when I jettison the money off to an investing account quickly, it feels like I never had it. All of this extra money is not sitting in my chequing account making me feel rich so that I can subconsciously buy more stuff. Instead it is actually making me rich by compounding untouched for years.

To quote squawkfox: This is really simple. Every time I get paid, I move a portion of my moolah to a savings or investment account. I move my moolah every pay, without fail. Some people call this “automatic savings”. I just call it common sense. I figure, why I am working so many hours if I have nothing to show for it at the end of the week! Moving my moolah every pay is the significant reason why I am finally sound.

I have to credit squawkfox, which happens to be a great blog, for the phrase 'MOVE THE MOOLAH' which is so simple yet so crucial to my financial strategy.


squawkfox said...

This post totally made my day. Thank you for thinking of "move the moolah" in your writing. I can be a little silly at times...but my "better half" and I do indeed mutter "move the moolah" every single pay. It's so simple. The solution to saving big bucks is really rather straight forward and elegant.

MG said...

squawkfox, Many people feel they don't earn enough to save. I think if they just moved the moolah first they'd make due with less and be better off long term.


Anonymous said...

MG, does your 40% savings rate include your mortgage payments and emergency fund? I also 'move the moolah', and reach a 43% savings rate if mortgage payments and savings for house & car repairs are included.


MG said...

hi rab,
I posted recently on my household savings rate here :

The 40% does not include mortgage payments, and I do not keep an emergency fund in cash. It does include savings toward my non-reg. portfolio which I guess you could call my emergency fund...