Chapter 9 - Saving

By Richard Valentine Reily, author of Gregory's Hero.

You remember that I lived in Steamboat Springs when I woke up financially. That day I was in some kind of beautiful place; rushing water, treeless peaks in the distance and a blue sky. Once my eyes were opened it was amazing what I began to see.

One of the first things I saw was a billboard. I suppose it had been there all along, though I had never noticed it. When your eyes are closed it’s impossible to see. Since my eyes were closed to money… well you get the idea.

Anyhow, the billboard said something very simple. So simple in fact that it appeared virtually impossible. The billboard was put there as an advertisement by the Routt County National Bank. It simply said, ‘Pay Yourself First’.

What a novel concept! Did it truly mean that I was allowed to keep some of my hard earned money and do whatever I wanted with it? Never in my life had I been able to keep anything after chasing around borrowing from Peter to pay Paul and never getting ahead of the never ending bills. Paying me first was an idea I could live with. I had been given permission to save.

We have already discussed the impossibility of reducing debt without controlling spending. Now that spending is controlled and debt is gone or severely reduced paying yourself, saving, is truly in order and the real payoff for all your hard work.

I began paying myself first even as I reached the payoff of my debt. I wanted the savings habit to take root and take place of the spending habit when my debt reduction was complete. After all if I paid off all the debt without a savings plan what in the world would I do with all that money I had been focusing on debt reduction? I don’t know you, but I know me and if I paid off all my debt without a plan for my money after that there was a real probability I could revert to my poor spending habits.

Paying yourself first is easy. Designate a small amount of money to begin saving. The amount must be small. Not too much, just a little. Say five dollars each paycheck. Are you wondering yet why I emphasize a small amount?

The object here is to create a habit. The object is not to build wealth, yet. We will get to building wealth later. We are still focused on reducing debt after all. Again, the object here is to create a habit, a new habit to replace the spending habit when debt reduction is complete. It has been said that twenty one repetitions make a habit. You only need save the same amount twenty-one times and you will be on your way.

If you commit to beginning the savings habit before the debt reduction was complete, you will come to the time when you are saving and the credit card debt is paid off. Then you can focus on savings as a primary use of your money. All the resources that have been focused on debt reduction may now be focused on building your savings.

What a wonderful day it is when you send off your last credit card payment! It has been said that it always rains at a funeral. I say it will be a bright sunny warm and happy day when you are done with the burden of debt. On the day you send in your final credit card payment your financial focus changes, from debt reduction to savings.

There are two types of savings. For simplicity I term them operating savings and capital savings. Be sure to understand the difference, it’s critical to your long term financial health and success.

First, let’s look at operating savings. This is money you put away on a regular basis that you intend to use at a future date for normal or unusual expenses. Since you are no longer paying down debt those resources can be refocused to saving for future events such as a vacation, college for the kids, new furniture, a new car, you get the idea. You have worked hard eliminating debt and you probably deserve a vacation or some gift to yourself that you pay for with money, not debt. Trust me, you’ll love the reversal.

Operating savings, however, are savings. When we get into fund accounting in the next few chapters, don’t mix up fund accounting and savings. Fund accounting is when you will prepay your planned expenses by putting aside a portion of the expense with each paycheck. Operating savings are built though disciplined, regular planned contributions to your savings account. Operating savings are only used for those expenditures that you have defined up front.

Secondly, there are capital savings. Capital savings are the most fun because capital savings are the savings that grow and grow and grow. Like operating savings, capital savings are funded regularly – with each paycheck. The difference between operating savings and capital savings is that you never spend capital savings. Did I say never? If there is any confusion here, let me repeat, the difference between operating savings and capital savings is that you never spend capital savings. Never, never, never, never…

There, I think that’s clear.

So, you might ask, what’s the purpose of capital savings? If you did ask I would first answer that that’s a great question. It’s important to understand.

Capital savings is for the creation of wealth.

Think about a business. A business takes in money from the sale of its products or services. Some of the money is spent paying the workers, the rent, the utilities and all the other expenses of running a business. A smart businessman reserves the balance, the profit, for reinvestment.

If the business makes widgets, and the widget machine cranks out enough widgets to fill only part of the markets demand, a smart business man will quickly decide that a second widget maker is required. But, widget makers are expensive to purchase so the businessman requires a great deal of money to acquire the widget maker.

Luckily he has saved his profits, keeping them within the business and the money he requires is in the bank ready to purchase his new widget maker. Because he is a smart businessman he is able to buy his new widget maker and increase his sales even further.

You may have noticed in the widget description that I did not suggest the smart businessman went to the bank to borrow the money for his new widget machine. He doesn’t have time for all the paperwork and doesn’t want to pay the interest. He has prepared for the new widget maker by planning for his business expansion.

Your capital savings work in the same manner. They can never be used for everyday expenses that you failed to plan for. Capital savings are used only to generate additional income for you.

Most people work all their lives and retire dependant on Social Security. Even if you forget all the hype about Social Security going broke in the future, today the benefits payable by Social Security do not provide a high level of security. The benefits might keep a roof over you head, or food on the table, but not much else.

Do you happen to work for a company that provides a pension plan? If so, lucky you; you are one of few. There were only about two generations who had the security of a company pension. Chances are you will not have that security.

That’s the job of your capital savings. To grow throughout your lifetime and provide you income when you chose to no longer work or are unable to work.

So the rules are clear, right? Capital savings are never ever spent. Except…

Capital savings may be used to buy a house, invest in stocks or other investments. My rule for capital savings is that they are used to earn, not spend.

When you invest in a house, even with a mortgage, you are investing in an asset. In most markets, over most time frames a house is an appreciating investment. Someday when you no longer want to work you can sell the asset, buy a less expensive home and have the balance for your expenses. You can use your capital savings for the down payment on your house, or better yet for the outright purchase of your house.

As your capital savings grow from the first small contributions you made while paying down your debt, the account will reach a balance where you will want to gain more than the simple interest a bank will pay. Generally when your savings gets to one thousand dollars you should look for another investment for your capital savings. We will discuss investments later.

Capital savings will grow and grow and grow. Capital savings are never ever spent.