“It’s not the big things that add up in the end; it’s the hundreds, thousands, or millions of little things that separate the ordinary from the extraordinary.” Darren Hardy, author of The Compound Effect
Financial planning in small steps doesn’t take large sums of money to start. In fact, financial planning can have a profound impact on financial security for Americans, especially lower-income households, by helping people improve their saving and budgeting habits. A written plan helps savers prioritize their goals and provides a way to measure success.
A disciplined, steady approach to saving, investing and ruthlessly managing spending wins out. Wealth-building habits don’t involve a get-rich-quick scheme —it is a slow, gradual process to accumulate wealth,” you must be persistent and consistent.
Savings habits
“The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.” Darren Hardy
While investing may appear at times to be complicated and risky, saving is pretty straightforward. Two-pronged approach to increase the saving amount:
- Generate more cash inflow.
- Reduce cash outflow.
Spending and saving often go hand in hand because whatever you don’t spend is potential savings. That’s why it is important to focus on buying things that will hold value or appreciate in value instead of allowing expenses to eat into savings through continuous consumption. To accumulate wealth, it is critical to manage expenses tightly. Instead of living just within your means, it is important to live below your means.
One way to reduce outflow is to maximize tax savings through retirement plans such as the 401(k). Another is to pay off debt and prioritize by paying the debts with the highest interest rate first.
Keep an eye on the prize
“There is a one thing that 99 percent of “failures” and “successful” folks have in common — they all hate doing the same things. The difference is successful people do them anyway.” Darren Hardy
Following the adage that it becomes easier to reach your destination or to achieve a successful outcome with an end goal in mind. Those who gain wealth believe that everything they do is ultimately done to fulfill their financial goals. For example, people should set a “retirement number” and a deadline for reaching that number. That number is the goal for how much cash and investments they need for a comfortable retirement and the deadline is the date to achieve the goal. Every time you put money toward saving, you’re a step closer to the prize.
Set It, But Don’t Forget It
Setting up an automated savings and payment system is one habit highly successful people practice to keep their financial house in order. They automate their savings, investing, bill payments and money transfers. But they don’t ‘set it and forget it’ once they set up the automated system. They know it’s important to maintain awareness and manage regularly, at least weekly, where their money’s going.
Automatic saving and investing
People have to be consistently reminded that to develop habits of saving and investing. The more you do develop the habit of saving and investing for the long term, the easier it will become. Consequently, it is recommended to set automatic savings protocols, if necessary, so a portion of your earnings goes directly from your paycheck into a separate savings account.
Habitually and automatically save 10% to 20% of every paycheck.
References:
- https://www.bankrate.com/finance/investing/financial-habits-of-wealthy.aspx
- https://jamesclear.com/book-summaries/the-compound-effect