Lesson 4 — The Habit of Saving
To advise one to save money without describing how to save would be somewhat like drawing the picture of a horse and writing under it, “This is a horse.”
The Slavery of Debt
There are two types of debt. The first kind is depreciating debts. For example, buying luxuries like cars, boats, and going out to eat.
The second kind is either appreciating expenditures or something that can be easily liquidated for the same cost at which they were purchased.
An appreciating debt example would be buying a home or a business. Most real estate increases in value by at least 3.5% per year, even aftermarket corrections.
How to Master The Fear of Poverty
- There are two vitally important steps to master the fear of poverty.
Stop buying on credit. Especially the depreciating expenses. Gradually pay off any debts that you acquired. - Replace the habit of debt with a better habit of saving and increasing income. Find a way to live without depreciating expenses.
Modern Thoughts — How Much Should You Save?
35% is put into savings that you can use for investments such as stocks, real estate, or some other method of buying and selling to receive gain. 65% is what you live on. If you can’t save 35% of your income, save 10%. If you can’t save 10%, save 2%. If you can’t save 2%, save $20 a month or whatever. But get into the habit and make it regular, make it automatic. When things improve, you can boost that percentage, you can boost that dollar figure and it won’t feel so painful to you. You’ve already set it up and you’re already in the habit of saving.
Modern Thoughts — Have An Emergency Fund With 10% Of Your Savings In Cash.
As a general rule, your savings should be sufficient to cover all of your expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least three to six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from living paycheck to paycheck.
Modern thoughts — How Should You Invest The Money You Saved?
Now that your cash is order know that savings are depreciating in today’s environment. The bank pays you a lower interest rate on your savings than the inflation rate. In essence, this means that your money in the bank loses more value than it gains over time.
Invest the 25% you save in gold(5%) and stocks(20%). Be sure to leave this money for quite a long time(10 years minimum) and add to it regularly, at least once a month.
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INVESTING PROS & CONS
- Pro: Longer time horizon allows for compounding interest, growing your money
- Con: Markets inherently involve risk, and investments may decline
- Con: You may face a penalty for withdrawing the money too soon
SAVING PROS & CONS
- Pro: Your money is liquid, so you can access it without penalty whenever needed
- Pro: You aren’t subject to market volatility
- Con: You’ll miss out on market gains and a potentially notable amount of compound interest
- Con: The cash loses value due to inflation.
