First a story from the wilds of Minnesota. Grasshopper No. 5 has been trying to change her billing on cable service from "automatic electronic payment" each month to a regular bill received by mail. She must have anticipated my rant on "never give anyone automatic access to your money". Well, in November she called to change to manual bill. Guess what? In December they still took electronic payment. I don't even know the excuse she was given. Then she called again and she was given assurance that it would change. Again in January, it was electronic deduction from her account. She has called again and you have to wait until February to learn that it hasn't changed. DON'T GIVE PEOPLE AUTOMATIC ACCESS TO YOUR ACCOUNTS. I don't care how easy it is to do or how many stamps you save.
Now THE HABIT. I'm talking of course about the SAVINGS HABIT. Here is another key to getting rich. Develop a boring, regular, disciplined savings habit. It is a mental determination to steadily set aside money.
Why set aside money? Your refrigerator craps out after 25 years. Car prices have gone up and you need a bigger downpayment. Your insurance rates just increased. You got your December gas bill and you can't believe how big it is. You need a new furace. You lose your job and you've got to eat or make payments on your new Honda. You get the idea.
First, Andrews rule is to try to save a minimum of 5% of "after tax" income. Suppose you earn $1,500 every two weeks. Most financial people tell you that should set aside 10% of "pre-tax" income. I've always disliked 10% of pre-tax because those aren't dollars I can touch. What I can touch is my "take home pay" or after tax dollars. $1,500 pre-tax translates to $1,150 after tax. 5% of after tax is $57.50 per payday and at 26 times per year, you'll save the minimum of $1,495.00 per year. You can buy a lot with $1495. If you could save 10% of after tax income you have $2,990 per year.
My personal habit was to open a savings account at a separate bank or credit union and on each payday actually drive to the institution and make a savings deposit. Notice the word habit again. I liked seeing my new balance with each deposit and I earned interest on top of it. By driving to the institution, I was making a conscious statement to myself.
With this habit, you are filling the cask steadily. You aren't depending on any sign from heaven. We'll figure out what to do with the money as it builds up to a significant amount later.
Then, don't touch your savings unless it is an emergency. An emergency is not new DVD's, an extra Xmas gift or a trip to the mall. An emergency is an expense that your regular paycheck doesn't cover. To use Paul's rule, don't use it for a "want", only a "need". And if you are going to withdraw from savings, drive to the savings institution and make a conscious withdrawal. Hopefully, it is painful.
Knowing your cask is steadily filling can be fun and satisfying. It also means you are spending less than you earn. Dah!
Make sure you develop a your annoying HABIT!
Love,
Dad (Just Chas.)