As you have learned by reading my previous white papers, you cannot begin to construct a nest egg until you have learned how to manage your finances. That is the hard part for many people.
Now for the easy part. This does not require that you be a genius, have well-heeled connections or obtain a specialized education.
John Clifton “Jack” Bogle (May 8, 1929 – January 16, 2019) was an American investor, business magnate, and philanthropist. He was the founder and chief executive of The Vanguard Group and is credited with creating the first index fund. John Bogle once stated, “The secret is there are no secrets.” Amen to that.
Have you paid off or transferred your high interest debt? To reiterate, the primary benefit of this being that your credit score will increase, therefore the interest rate at which you can obtain financing such as for a mortgage or car loan will decrease. This translates to savings on what would have been higher interest loans over a period of years.
High interest credit card debt, unsecured loans, student loans and basically anything over 5% per year needs to be paid down as quickly as possible. If you are unable to do so, then seek alternate lower rate options via loan consolidation and transfer your balance(s) accordingly.
There are examples of ‘good debt’ such as a mortgage or asset that holds or appreciates in value. This type of debt enables you to accumulate wealth in an asset that produces a rate of return over time.
This is counter intuitive, but do not deploy 100% of your available liquidity toward paying down debt. You must maintain funds on the side. A single unplanned expense could send you into a financial tailspin.
Across nearly all ages and generations, from millennials to baby boomers, one-quarter of Americans, or roughly 55 million people, said they had nothing saved in an emergency fund, according to a Bankrate.com survey.
“Many Americans are kidding themselves if they have less than three months’ worth of expenses in emergency savings and claim to have any level of comfort with that,” Bankrate’s Greg McBride said in a statement.
McBride recommends stashing at least a six-month cushion to cover anything from a dental bill to a car repair — but more if you are the sole breadwinner in your family or in business for yourself. Generally, the likelihood of having saved at least six months of expenses increases steadily with age, Bankrate said. More than a third, or 36 percent, of boomers and 42 percent of those in the silent generation had achieved that saving milestone.
Seem simple? Being frugal can of course be boring and unsatisfying. But simplifying the possessions around you and traveling a bit lightly through life do take the financial pressure off. Spend your time and energy on creative projects that interest you or even better that produce income.
The Motley Fool offers some suggestions toward achieving the goal of reduced spending that I believe are practical and could be easily followed – here are my top 10 favorites from their list.
- Track your spending
- Consider going to cash only
- Freeze your credit cards
- Institute a 24-hour rule for purchases
- Have no-spend days
- Stop purchasing coffee drinks and beverages
- Avoid shopping when you’re hungry
- Unsubscribe from email newsletters and catalogs
- Remove your credit cards from online accounts
- Cancel subscriptions you’re not using
Cutting spending doesn’t have to be difficult. Chances are some of the suggestions on this list will help you to spend less. After all – who does not purchase the occasional coffee drink at a Starbucks or Dunkin Donuts (item 6)?
Invest Excess Capital
Your highest priority is to invest capital that remains after payment of living expenses. Capital that is well invested works for and alongside of you as you focus on maximizing your paycheck. A simple way to ensure that you do not spend excess capital is to set up a 401k deduction with your employer. Oftentimes places of employment will also offer generous matching plans. By saving at least 20% or more of your income each year, you’ll begin aggressively compounding your wealth. This paper is not intended as a guide to investing or building wealth. My goal is to illustrate for you how small changes executed over a long period of time can have the largest impact on your goal of building a nest egg that is suitable to your short and long term needs.