Save Money and Become Rich

I have attended many presentations over the years as part of my continuing professional development when I had my own financial planning company.  I have since sold the business and now mentor sales people on communication skills when interacting with their prospects.

However, with the current credit crisis taking a strong hold, and the effect it is having on individuals, I thought I would highlight the best bit of advice I ever picked up during all my time in finance.  It is simply this:

Although most people "intend" to save, very few actually do.  

There are two distinct types of people:

Type "A" - who get their paycheck and religiously save the first "X" amount each month, and then spend what remains (on living expenses and alike)

Type "B" - who get the same paycheck, and fully intend to save at least something at the end of the month - in other words, they intend to save whatever is left over.  

It does not matter how much money you earn. It is the principle of saving that generally determines whether or not you end up wealthy (ignoring the lucky few who inherit wealth or those who create wealth by successfully building up their own business). I have seen too many millionaires lose everything by not having strong savings principles in place.

It is no surprise to know that type "B" people rarely "get there" - life has too many nasty surprises that cost money. Sure, some months may show a residual amount left over which can be saved, but more often than not, any spare money you have allocated in your mind to save becomes required for a last-minute need.  There is always next month to catch up, isn't there...?

Type "A" people are the ones who end up wealthy.  After saving regularly, it becomes a HABIT. They become accountable to themselves, accountable to their "savings pot" - it becomes a principal that they cannot break.  They become competitive, as it becomes exciting to see your money continually grow - not only as a result of ongoing savings being added to your pot, but also from the growth that your money makes (i.e. "compound growth") - it's true, "money does make money!"

The habit itself is what you need to create. You do not need to earn lots of money to start saving. If your income is low, then start by saving a minimal amount, say $5 per week. You can increase your contribution as time goes by.

Now here's the secret - call this new savings pot your "Long-Term Lifestyle Fund".  Promise yourself that anything you put into it, you will NEVER take out - once in, it stays there. That way you can never be tempted to "borrow" from it whenever it takes your fancy. The idea here is that you will be continually adding to the capital amount, and as this grows over the years, it will start to generate a sizable income.  It is this income that you can then use to fund your lifestyle. (You should put aside additional savings to cover emergency needs and alike)

Fact:

To be deemed truly wealthy, you need to have a regular residual income (by that I mean an income that is generated without you having to earn it/work for it - so this does not include your salary) of a higher amount than what you actually need to live off.

Having a target of building a lump sum of a million dollars is not what your goal should be - it should be to build up a large enough fund that can generate an annual income that is larger than your annual living requirements. That is true wealth.

I cannot stress how exciting it is to see your "pot" grow. Whether is is seeing your savings grow to its first $100, or whether it is seeing it reach a larger milestone, you get a real sense of accomplishment as it inches up month by month.  

You cannot help but get competitive and start to find new ways to add additional funds where you can. Whether it putting loose change into a piggy bank (and again- once in there, the coins NEVER come out - apart from being added to your saving pot each time it fills up), spending less on items from time to time and purposely adding the amount you have saved into your pot, or eating out once less each month.

Saving is an art that needs to be mastered - luckily, it is a simple art that only requires mind over matter, the creation of habit.

Good luck.