Saving, the key to financial independence

Most people think that saving for a rainy day or emergency is something you do ‘just in case’ you have, well, a rainy day. From a loss of income to a car repair, a financial emergency can sneak up at any time. Of course, for some people, an emergency fund and a rainy-day fund are two separate issues. We will address them on a separate article in the future. However, what if we look at savings per se from an unfamiliar and countercultural perspective? What if savings could help us achieve financial freedom? And even further, what if saving can completely change our family lineage tree?

As young couples get married and start building their own families and traditions, there are a few progressions that happens. First, young couples when they get married, they quickly realize that they have 2 incomes at their disposal. They are no longer individuals with individual goals, but a unit with common goals. They also realize, that a couple can live almost as cheap as a single person (with a few added expenses) Second, young families start thinking about the future. Buying a home, a new car, and having kids. Ironically, with that future ahead, debt starts to creep up on couples like there is no tomorrow. Third, a few financial mistakes happen. Buying new cars are usually the first culprits, taking a good chunk of the couple’s income. Then there is the home, taking in good cases 30 to 35% of their income monthly. Then there are the gadgets, and whistles that go inside the home, adding a little more burden. Finally, to top it all, then comes the kids. After a few years our couple had amassed an average of $130,000.00 in debt (including credit cards, mortgage(s), and car loans). That is, if the couple, did not have substantial amounts of student loans and other miscellaneous debt, prior to their marital union. Finally, we cannot forget the family vacations, and the usual trips to visit family and friends that sneaks up on our couple’s life from time to time to add to the problem. According to the good folks at Motleyfool.com this average can take up to $6,600.00 a year in interest payments alone from our young family.

If that scenario sounded familiar to you, you are not alone! Most young couples go through different variations of the same life cycle (I call it a poverty cycle). Savings in most cases are not even part of the equation until way too late. Or if the couples have a savings account, it is usually designated for small emergencies. While saving money for a rainy-day/emergency is a wonderful way to start, it is not the ideal of what savings ought to be.

Savings should be used as a tool to help families get ahead. What do I mean by that? follow along as we disclose a few tips to help you see and understand savings in a whole new way.

  • Time is of the essence. Save as much as you can as quick as you can. The older a couple gets, most likely, the more liabilities and debt they will acquire. Get out of debt as quick as you can and start saving at an early age about 20% of your income, no matter how big or small. Ideally, you should be saving about 12% to 15% of your income for your retirement alone.
  • Save to invest. Saving money and putting it into a saving account, will not help you get ahead. Look for places where you can invest the money that you have saved. Mutual funds will be a good place to start.
  • Diversify your savings. When you save money, always keep some for emergencies. But the bulk of your savings should be in places that can gain you more wealth. Be smart and ask questions. Find a certified independent wealth management firm in your town that can help you be resourceful.
  • Save with purpose. Use your savings as an asset that will allow you and your family to make better financial choices. Having a purpose can help you make those choices a lot easier. Save for retirement, a car, kids college, etc. putting purpose for each of those categories helps you be on target and efficient.
  • Teach your kids to save smart. Teach them the ‘debt/poverty cycle’ and help them break out of it. If you are a little more proactive, open a ROTH IRA and a savings account for your kids at an early age to help them be financially free later in life.
  • Love to save and hate to waste. If you dislike wasting, you will save more. This does not mean you must be cheap, but be frugal. Say ‘no’ from time to time, and you will see how your savings will increase. Frugal families can save over 20% of their incomes.

If we start looking at savings from this countercultural perspective, unlike the rainy-day/emergency mentality that is king in our nation today, we will see how our legacy will begin to change. For some people, this article will be even problematic, as they might think that mixing ‘savings’ with ‘investing’ might not be a good strategy given the fact they are separate issues. This is true at a technical level. However, my argument always goes to a practical one, and most families (mine included), don’t operate at a pure technical level.

Finally, I believe that if we model such behavior for our kids and young people, they will pick up the power of financial freedom. They will break this poverty cycle and be in a better financial position to help others. Don’t be a procrastinator, start saving today. Enjoy!

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