By David McEwen
Monday 12th February 2001 |
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He has a top job at a Wall Street investment bank, lives in a swanky apartment and drives a luxury car. On the other hand, he has to service a US$1.8 million mortgage and is spending huge amounts on servants, private school fees, parties and holidays. Eventually he concludes that he is "slowly going broke on a million dollars a year".
This slice of life illustrates a key investment principle. It doesn't matter how much you earn if you don't save.
Most people try to improve their lives by earning more. This generally involves working harder or taking greater risks. But this brings little benefit if spending goes up by an equal or greater amount.
Like most things in life that are good for us, planning and self-restraint is needed before the rewards come.
A formal savings plan is a good step towards building wealth. Without such a plan, it is very difficult to build up capital which can then be invested to generate more wealth.
Here are a few hints on setting up a plan:
- Write your goals down. Putting something on paper helps make it more real in your mind - and harder to ignore if posted up somewhere prominently. Set some short-term goals - such as saving $100 a week - and long-term ones such as paying off the mortgage early. Write down the exact date you want to achieve these goals.
- Set up a separate savings account. If your savings are kept in your regular account, it is easy to dip into them. Instead, have money transferred by automatic payment from the account you usually use into a less accessible one. After a while you won't even miss the money. To avoid temptation, make sure you don't have an ATM card or cheque book for the new account.
- Start a budget. If you don't know what your income and expenses are, you don't know how much you realistically can save. If you don't know where to start, seek help from a financial adviser or try one of several very good software packages that are around.
- Hang on to unexpected income. Lotto wins, salary increases or revenue from that garage sale shouldn't be treated as a spending opportunity. Once that money is spent, it's gone forever. If it can be retained as savings or an investment, it will go one producing income for you as long as you want it to.
Despite these points, I am not suggesting you become a miser. I doubt many people want to eat cold porridge three times a day just to save money.
Life is meant to be enjoyed and the reason we save is to help us enjoy life even more in the future.
Balance is important. As Sherman McCoy finds out, spending more than you earn does not make for a happy life. The same applies if you spend too little.
Where that balance lies is up to you. Whatever you decide, make sure you have a plan and that you stick to it. Watching that bank balance or investment portfolio steadily building up brings its own rewards, and can be strangely addictive.
David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.
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