#2 – Save 10% of what you earn. Another way of saying this is to Spend Less Than You Earn. If you follow this rule – you will automatically be doing a lot of things right: You will not need credit cards. You will have emergency funds. You will be building funds for financial independence. If you can learn to follow this one rule, you will be well on your way to living a successful financial life. Everything else is icing on the cake. If you do not follow this rule – anything else you do is almost wasted. I did not invent this rule. It has been around for a long time and goes by many names: – live within your means – save 10% of what you make – pay yourself first – etc., etc., etc. When I say “spend less than you earn”, I mean live on 10% less than your total income. This will allow you to save at least 10% of all money that you receive during the year for your future security and financial independence. Four Hints:
1. Make a commitment to yourself Commit that you will spend at least 10% less than you earn and manage the money you save reasonably. Once you make the commitment, the details of how to do it will fall into place.
2. Make the savings automatic Having to write a check to savings each month significantly decreases your chances of success. Find a way to automatically take the savings out of your paycheck before you see it: used automatic withdrawals, make automatic contributions to your savings plans (401Ks, IRAs, etc.). Do whatever it takes.
3. Forget the Joneses Most of our problems stem from trying to keep up with the “Joneses” – comparing ourselves to others – what we earn, what we have, etc. The Joneses have done far more harm to us than any of us know. This subject is addressed in great and interesting detail at: http://www.forgetthejoneses.com
4. Learn to enjoy the simple life We make life too complicated. Learn to enjoy the simple pleasures of life. Vacation locally, cook more, and go out to eat less.
What to do with that 10% you save: You should be doing three things with money you save: Build a liquid cash reserve so that you have money set aside for emergencies If you don’t already own a home, start setting money aside for a down payment on a home Begin investing money for your financial independence After a few years, you will own a home and your cash reserves will be in place. From that point on, the entire amount you save will go toward building for your financial independence.