Prioritizing Savings

Do you prioritize savings? If you are a millionaire, there is a good chance that you do. According to the author of the book The Millionaire Next Door, people who become millionaires tend to live well below there means by spending only 80% of their income. The other 20% is saved and invested. Many people want to save and intuitively know that they should save more. They might even plan to put whatever is left over at the end of the month into savings. Their monthly flow of money looks something like this:

present-oriented-flow-of-money

present-oriented-flow-of-money

I call this the present-oriented flow of money. This plan rarely works because there usually isn't anything left over to save. The reality often turns out to be more like this:

Actual-present-oriented-flow-of-money

Actual-present-oriented-flow-of-money

The wealthy mentioned above "pay themselves first". Before they pay the grocer, or the bank, or the department store, they pay themselves a set percentage of their income. There flow of money looks like this:

future-oriented-flow-of-money

future-oriented-flow-of-money

Religious people are taught to add one more bucket to their flow of money. That bucket is charity. L. Tom Perry, said:

After paying your tithing of 10 percent to the Lord, you pay yourself a predetermined amount directly into savings. That leaves you a balance of your income to budget for taxes, food, clothing, shelter, transportation, etc. It is amazing to me that so many people work all of their lives for the grocer, the landlord, the power company, the automobile salesman, and the bank and yet think so little of their own efforts that they pay themselves nothing.

 A religious future-oriented flow of money looks like this:

religious-future-oriented-flow-of-money

religious-future-oriented-flow-of-money

There are religious and secular reasons to give to charity. A study done by the economist Arthur Brooks found that after accounting for variables, those who give to charity tend to make more money as a result of their giving. In other words, if you take two people that have the same religion, income, career, and education and track them over time, the one that gives to charity actually makes about $14,000 more on average than the non-giver. I will write more about charity in the future.

In conclusion, it is more difficult to save when expenses take priority over financial goals. Saving only seems to work if you get into the habit of paying yourself before your other expenses. So follow the example of the wealthy and start saving today.