And money is like oxygen, we have to have it, and saving is a key part.
Saving gives us a sense of achievement , more personal freedom, access to cash in emergencies, may allow us ease our workload, and maybe we can retire sooner .
As we get older life insurance and medical insurance become very expensive, we can drop off those costs and if needed use our savings instead. If not needed of course, the saver wins again.
We are all out there working for money but your savings pool is also working for money . From time to time you should be able to have a luxury or two paid for by your “money at work” – the interest, dividends, and capital gains.
things savers need to know………………………………….
· don’t let your money be lazy - no low interest-bearing accounts
· how to put money out to work
· learn about the magic of the magic of compound interest
· & the magic of compounded dividend and compounded capital gains
· how averaging works for you & can reduce risk
· why diversification is very important
· why rebalancing is very important
Your savings need some organisation as most people probably need to 3 to 5 different pools. Each one need to be earmarked for a purpose and used only for that purpose- a key saving discipline.
· emergency money – essential
· short term such as holidays and car upgrades
· women ,especially those at home with children, might want their own little pool
· medium term for a house deposit, and then diverted to mortgage payments
· may be a pool for children’s higher education
· long-term for retirement (Kiwisaver won’t be enough)
Winston Churchill said he “never worried about action, but he always worried about inaction.” If we don’t act and get started, we put ourselves behind the 8 ball.
Any saving is good saving, and any amount is better then none.
For the best chance of success, make sure it is set up to be automatic.
Access to cash ( liquidity) so important
You need some money in a hurry but you put every penny into your house and/or the rental house that you bought recently.
You might have property worth $1 million, debt of $500,000, and net assets of $500,000, but you cannot lay a finger on $1,000 in cash.
Your good old savings pool saves the day.
No bank will lend you cash if your income stops for any reason e.g. redundancy, illness, accident.
Your savings might save you, but they must not be in the bank where you have your mortgage, because the bank can help itself to all your accounts if you are in arrears.
Keep control, put it elsewhere.
Never put your emergency money in the same bank where you have your mortgage
Build up your emergency pool before paying off your mortgage.
An inheritance is a gift not right
We can’t rely on any inheritances. We need to be self reliant, just another reason to start saving today.
Don’t base too much reliance on the value of your business to fund your retirement
Save too - a retiring business broker told me that the valuation gap between vendors expectations and what the buyers will pay is very wide.
Beware of having rose coloured glasses as to the value of your business.
Most business owners would be best to save into a fund outside of their business to be sure. In addition this would add diversification and access to cash if an emergency occurs.
Waiting v costs
Save $500 per month for 25 years at 6% net return and it will grow to $349,000
Procrastinate for five years and then start;
- $500 per month 20 years at 6% net return you will get $234,000
A big difference and a big cost
Next week – Part 2
Next week we will cover where to put your savings, diversification, lazy money, the magic of compound interest, averaging, rebalancing and where toq get advice.
This article was supplied by Alan Clarke who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes regular articles on www.acfs.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.