THE POWER OF A ONE-HOUR PIZZA…

Back to Basics my friends.

In my book, Choose Wealthy, I make a comparison between The Poverty Mentality and The Wealthy Mentality.  One of the many differences is that Wealthy people understand the word AND much better than Poor people.

Poor people often think, Saving and Investing really means the  same thing.

They do not.

Saving is about principal preservation in preparation for future opportunities.

Investing is about principal appreciation in preparation for future opportunities.

More generally, Savings are typically short-term in nature and are to be used on luxuries, emergencies and investing.  Investing is all about long-term appreciation, cash flow and compounding.

They are different but intertwined.  Think of the roots and branches of a Tree.

Savings are like Roots.

Investments are like Branches.

Neither functions completely on their own.

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People bemoan the fact that Saving money is a loser’s game.  If one factors in interest paid to the saver, taxes charged against the saved and inflation devaluing the remainder the bemoaning masses are 100% correct.

You will never become Wealthier(in any real sense) by simply saving money.

You must understand that Saving money has little to do with accumulating interest on that money.

It is about limiting access to the money while preserving the principal.

“Wait, what?  I get the keeping the principal part but what’s that limiting access crap?”

You are limiting access YOUR access to YOUR money in order to keep Future YOU from spending what PRESENT YOU is saving.  Think of it as a game of hide and go seek with you, you future self and your money.  You hide the money so that Future you has trouble finding it.

You’re weak.  I’m weak.  We are all, to some degree, weak.  Admit it and move on to sunnier days.

“Okay, I’m weak.  I need to hide my money some to keep me from spending it on pizza and beer.  Cool.  But how would I do that and why am I saving if not to Spend or earn Interest?”

The Second part is the key.

Principal preservation.

The purpose of Saving money should be to maximize protection of principal from:

1.) YOU

2.) RISK

3.) INFLATION

All three are easily accomplished with some basic actions on your behalf.

Action Step:

Set up regular payments to a savings account to which you have limited access or would have to wait 24-48 hours before liquidating (cashing out).

HOW?

Set up an online savings account.  You’ll find much better rates online than you will at the bank around the corner for a few simple reasons.  Low overhead, minimal advertising and automation.  You can find great accounts online including ALLY.  Ally has consistently been rated one of the best online banking/savings opportunities, period.

A solid way to at least battle inflation with a little dignity is through Treasury Direct.  Years ago a person had to go to a bank, get a form to fill out, pay the bank some cash and then at some point 4-6 weeks later you’d receive a Government Bond in the mail.  No longer.  Treasury Direct offers an easy-to-navigate page and regular savings options.  To defend your Savings against inflation check out Treasury Inflation-Protected Securities (TIPS).  One thing to notice though is that the interest paid through TIPS is adjusted UP or DOWN depending on the Consumer Price Index (CPI).  For a fascinating (Hello sarcasm, my old friend) read on the CPI and its calculations check this out.

“What if I don’t want to open an account online?” 

The answer is simple if not a little old school and will require you to do more than sit hit a few keystrokes.

Open a savings account in another town. Say 30 minutes or so away.  DO NOT APPLY FOR A DEBIT CARD TO BE CONNECTED TO THAT SAVINGS ACCOUNT!  If you open up the account in another town without a DEBIT CARD this is what will happen next time you want to order Pizza with your savings.

-Check the time to ensure it is Banker’s Business hours, not a National Holiday and not Sunday.

-Drive one-hour round trip to get the 20 bucks you want to waste on bread, cheese and sauce. 

If you’re willing to do that for Pizza or some other impulse item, I am sorry.  It is my sincere hope for you that Social Security does not run out of money.

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Remember up top when I discussed the use of the word AND?

Yes.  This is SAVINGS AND INVESTING.  First you SAVE AND then you Invest.  If you have no money saved you will not have any money with which to INVEST!  One of the many steps the average person must take in order to Choose Wealthy is to save money. No, don’t just avoid spending it on clothes so you have more to spend on food.

Saving is a physical act of setting money aside, not simply reallocating from one expense to another.

Where you are going to invest does not matter at this point.  Go open the account, set up the payment plan, understand Bonds or drive 30 minutes in either direction.

Take action.

Choose Wealthy.