126: Modular Financial Planning 04: Adopt a Savings Habit

[00:00:00] Intro: Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs, and advisors about how they mindfully minimize the time and energies. Spent thinking about money. Join your host, Jonathan DeYoe, and learn how to put money in its place and get more out of life.

[00:00:33] Jonathan DeYoe: Hey there and welcome back to Mindful Money. We’re in the middle of reviewing the Mindful Money modular financial planning process. Last time we talked about developing your vision, the vision of a perfect life, starting with values. We went through five steps to creating specific.

Measurable, achievable, timely goals and introduce the Mindful Money, values, purpose and Goals course. To help you do this on a regular basis, we suggest perhaps annually and today we’re gonna build further upon this [00:01:00] foundation of knowledge and talk about adopting a savings habit, which is the next step in the, , modular financial planning process.

So this episode is the fourth of a 10 part series, which covers everything you need to know about creating or starting to create your own modular financial plan. There’s no secret to building wealth. Contrary to popular opinion, the steps to growing wealth are not sexy or tricky or speculative, nor do they require personal brilliance or constant hands-on management.

What it takes to build wealth is within your power right now. Your financial success comes down to establishing healthy financial habits as early in your life as possible, and. Whether you have a high or low income job or young or old, you can adopt the habits that will help you achieve your money goals.

The single most important habit you can develop is the savings habit.

The savings habit is the iron wire on which all the other habits can be hung. It is the surest way to improve your financial wellbeing and [00:02:00] begin the wealth building process. After developing a vision of your ideal life, which forms the foundation of your financial plan, informs the trade-offs you’re willing to make and sets your financial priorities.

The next step is to start saving. Admittedly, this is often easier said than done. Many people struggle to save. , the following steps will help you turn saving from a loose goal into a lifelong habit.

The first, and probably the most important rule of personal finance is spend less than you earn. The second rule of personal finance, never forget the first rule.

If there’s one money rule to live by in every season of your life, no matter what happens, it is to spend less than you earn The best thing you can do for your financial health and happiness is to start the habit of saving as early in life as possible. I’d be lying to you if I said it was going to be easy. It took me until my early 40s to commit to a consistent savings habit.

I saved and then I spent my savings and then I put more money into 401k and I liquidated it to start a business. So I [00:03:00] had already been a financial advisor for 15 years by the time I actually made this commitment to the savings habit, , and started on my own journey to building wealth. It is possible, and you can do it with continuous effort and continuous reinforcement.

There are always cooler things to do with money than safe, but it can quickly become a gratifying habit. If you let it like removing the training wheels from your bike, you’re gonna feel the control over your life. That saving gives you. And then we have to learn how to mind our balance sheet. So an effective mentality to take is to think of yourself as a small business.

There are two crucial financial statements every business needs. There are cashflow statement and the balance sheet. The cashflow statement tracks the money coming in and going out every month. The balance sheet is the cumulative effect of that cash flow. IE it is what you owe versus what you own. Spend more than you make on a regular basis and your balance sheet [00:04:00] withers.

As debt grows, this inevitably ends in a failed business or a failed personal financial plan. Spend less than you make, and your balance sheet strengthens as your assets grow. Every successful business and financial plan starts here.

So your balance sheet includes your emergency fund, saving for medium term spending goals, and investing for your long-term future.

, the most common purpose of your personal balance sheet is the ability to create a retirement income stream that rises with your rising cost of living and lasts the rest of your life. As a retirement income planner, I’ve spent the last 30 years helping thousands of families create this income stream.

One day when you stop earning income, barring a massive windfall, you will rely on your balance sheet, the one you’ve built for the majority of your spending. The only way to reach that point is to , start spending less than you earn many, many years in advance and consistently add to that balance [00:05:00] sheet from your cashflow.

Many people make this an issue of having greater income. And of course, more income makes it easier to save, but it isn’t as much about having more income as it is about making better spending choices with the income we have.

So to do this, I want you to try to empathize with your future self so people don’t like saving in their younger years because.

The future seems abstract and distant, but think of what your future self would ask of you today. Would they appreciate better financial decisions today for a better life in their future? Are you spending on anything today that you might look back on and regret? Now, if you said yes, don’t worry, you’re not alone.

, 2019 bake rate survey found that the majority of Americans have at least one financial regret, and the biggest of them is almost always not saving enough. You don’t have to live with regret. If you heed your future self’s call, you will enjoy that better life because every dollar you save now means [00:06:00] much more freedom and enjoyment later as time and compounding work their magic.

You’ve got to learn to take advantage of Compounding. One of the most powerful financial tools in anyone’s toolbox requires nothing of you other than saving. Once you have saved enough to set aside your emergency fund and pay off your high-interest debt, you can start taking advantage of compounding compound interest is the eighth wonder of the world.

He who understands it, earns it. He who doesn’t? Pays it. . Once you start the engine of compounding, it will change the trajectory of your financial life. Compounding means taking the earnings, your savings, or investments generate, and adding them back into the pile.

Then the money earned from that money earns money and the money earned from that money earns money and so on, and so on and so on. Compounding is the source of , personal financial freedom and personal financial [00:07:00] momentum when you carry debt, I. The momentum of compounding works against you. When you have invested savings, your financial momentum accelerates over time.

Compounding grows your savings and builds your wealth requiring nothing from you. The compounding quickens the longer you continue participating, the sooner in your lifetime you begin the process of compounding, the higher your returns are gonna be. Over time. Money that’s left to compound for decades begins to produce staggering results.

But you can only reap the rewards of compounding if you start by saving. So one of the things you have to do is you’ve gotta look to that written vision that we did last week and then rank your priorities. The most effective way to increase your savings is to remember that vision. The life vision we developed last week articulates your priorities.

What’s important to you. Once you know the vision, you know the difference between need to haves and nice to haves in terms of your personal wellbeing and happiness. If you know you need to increase [00:08:00] saving, you know which elements of spending to protect and which items can be traded away for greater future wellbeing, you can always cut out spending on the lower priorities.

These things mean less to you and your unique version of happiness, and you can save that money instead. You should take your whole life into account when you do this. Saving for your child’s education may be more important than buying a larger house with a higher mortgage. Such a mindful trade-off in the present moment allows your whole life to unfold more happily.

So you’re gonna need to do the math to determine how much you should save. A common rule of thumb is to permanently put away 10 to 15% of your paycheck, starting when you’re young, in your twenties, if possible, given enough time. , this should allow you to maintain your current lifestyle upon retirement.

If you’re starting later in life, you may need to save even more as a percentage of your income to catch up, especially if you wanna retire at or near your full retirement age, which for most of us is [00:09:00] 67 ish. Saving a set percentage guarantees that your savings remain proportionate to your income and your lifestyle requirements.

If you can save more, do it. , getting started might be hard, but once you’re comfortable with whatever percentage, you won’t even notice it. When it becomes easy to increase that percentage by 1% on occasion until you’re saving enough to meet your financial goals. , the quicker you get your savings up, the sooner you begin to knock down your most important financial priorities.

If you haven’t been saving, , in this way and increasing your savings in this way, that’s okay don’t beat yourself up. If you missed out on saving early in life, start now and work to boost the amount you save as quickly as you can, and then maybe to the best of your ability, put your savings on autopilot.

Of course saving is difficult with all the temptations to live life to the fullest. Now there’s always a new streaming service and a new gadget. Friends and family, we’re gonna suggest bigger vacations, you know, grander things to do, and I can always justify spending money on my own [00:10:00] kids. You can, however, reduce the possibility for temptation and commit yourself to saving for those critical goals.

By automating your savings. Pay yourself first outta sight, outta mind. Anytime you can arrange for your savings to happen, automatically do it. Most banks offer some form of automatic savings transfers. , if you have an employer that provides a 401k plan, you’re gonna be able to automatically deduct contributions from your paycheck.

Not only is it an enforced habit, but the employer may also, if you’re lucky, , match your contributions. So you always wanna save enough to capture the match. Remember that saving alone isn’t enough to ensure a happy and financially secure future. You also have to be vigilant about spending.

You’ve gotta check the financial boat for leaks. One can automate their savings and watch the money get put away while still using their credit cards to overspend. Saving with one hand while spending with the other leaves you stagnant. The debt bill always comes due with interest usually.

The goal is [00:11:00] to save, and then ultimately, once you’ve built your emergency fund and paid off that high interest debt, put your money to work by investing.

When saving becomes a habit, life becomes much easier. The possibilities in your financial life become much more bountiful, and you begin to build wealth.

As always, thanks for listening. Next time, , we are gonna go through the next steps in the Mindful Money Modular financial planning process, which is the first thing you’re gonna be saving for, which is your emergency fund. Thanks for joining us, and I’ll see you next time.

[00:11:31] Outro: Thanks for listening. Full show notes for each episode, which includes a summary, key takeaways, quotes, and any resources mentioned are available at Mindful.Money. Be sure to follow and subscribe wherever you listen to your favorite podcast. And if you’re enjoying the content and getting value from these episodes, please leave us a rating and review at ratethispodcast.com/mindfulmoney. [00:12:00] We’ll be sure to read those out on future episodes.