Today I’m honoring the birthday of my mom, Mrs. Marjorie Gray, who passed away three years ago. She would have been 78 on May 2nd.
My mom, of blessed memory, grew up in Los Angeles, the child of immigrant parents who fled Nazi Germany. Scarcity and frugality informed my mom’s youth as her parents rebuilt their lives in a new country. My grandfather’s new business ultimately grew and profited, easing the family’s financial situation. But those early habits of careful money management were how my mom and dad (also an immigrant from Nazi Germany) raised me. I grew up shopping in discount stores like Sears, cutting coupons and wearing my older brother’s hand-me-downs, in addition to my girlie wardrobe.
And although my parents beautifully role-modeled sensible financial management, I was never formally taught, at home or in school, the basics of setting up my own personal finances for success.
Like most people.
Because once upon a time, money was a totally taboo topic. Nobody talked about it. You just kind of learned, through osmosis I guess, how to do it.
Or maybe you didn’t.
Which is what happened to most of us.
And so we’re just muddling through.
And making mistakes along the way.
Like I did.
In honor of my mom’s 78th birthday, here are 5 things your mother never taught you about saving – that you can start taking on right away.
1. The difference between Savings and Investing
We all know we’re supposed to save for a rainy day. And we’ve also heard that we need to save for the future. But saving for the future is bad advice. You don’t save for the future. You invest for the future.
Saving is for money that you’re likely to need in the near-term. Like summer camp for the kids, quarterly taxes, insurance premiums, car registration or just in case you have some unexpected home repairs. Personally, I need to save money to visit the dentist every year. As a mom of eight, dental visits are not a trivial expense for our family.
Savings should be safe and easily accessible. If you need emergency plumbing work, you’ll feel greater peace of mind debiting your savings account than charging your credit card.
Investing is how you grow your money for the future. You invest in assets with an expected return that’s higher than savings. Although your investments can fluctuate in value in the short-term, they’re expected to rise handsomely and beat inflation in the long term.
Getting nervous about investing and choosing safe savings instead can jeopardize your retirement nest egg.
2. The magic of compound interest
When I opened my first passbook savings account at 11 years old, I was excited about the few cents of interest I earned each month. Money for nothing, right? But I never learned that keeping my money in the bank for a long time would yield interest on interest on interest on interest. Compound interest! And that over time, those little bits of money would add up to big numbers.
Let’s say, for example, that you save $100 every year and earn an average 5% interest rate. At the end of 30 years, your $3000 of savings will grow to $6876.
As a comparison, investing that money at a 10% average annual return will grow your money to $17,994. That’s the magic of compound interest.
3. The importance of a dedicated savings account for irregular and periodic expenses
The financial life of a young adult is pretty simple. I lived at home and earned money babysitting, cleaning houses and working in my cousin’s camera store. My earnings easily covered my periodic purchases.
As we grow into adulthood, however, we take on more fiscal responsibility: e.g., home ownership, car expenses, taxes, and childcare. Our financial lives become complex.
And without proper financial planning, many too many people end up juggling their money, scrambling for cash and swiping their credit cards to cover costs that pop up from time to time. I spoke with one mom last week who’s stressed about her May expenses. She needs to pay for school registration, life insurance and summer camp this month. She’s ready to cry when she sits down at her computer. Ugh!
To relieve your financial stress, I strongly recommend that you set up a separate savings account to hold the money you need for the irregular, fluctuating and periodic expenses you have each year. As an irregular expense comes due, you pay it out of this dedicated account. You’ll feel calm and relieved knowing that the money is there when you need it. No more last minute scrambling. No more borrowing from Peter to pay Paul. And make sure to regularly top up your account so you’ll always have enough cash to cover the next set of periodic expenses.
4. The importance of a Financial Freedom Account
When I was 25 years old and working in London, one of my co-workers invited me at the last minute to join her on a ski trip in the French Alps. Luckily, I had the money in my savings account and away we went.
Yes! This is what financial freedom is all about – having enough money to pay for unexpected expenses without using your credit card and without getting panic attacks. Sometimes it will be a ski trip. Other times it will be when your two-year-old breaks your prescription sun glasses (been there, not fun!).
For the good things and the not-so-good things, a financial freedom account enables you to cover your expenses and breathe easy when life happens. Because life always happens.
5. The critical importance of retirement accounts
I know that retirement seems like a long, long time away for some of you. Others are nearing retirement, or are already there. I wish someone would have sat me down in my younger years and explained to me the critical importance of maxing out contributions to my tax-advantaged retirement accounts plus the mind-boggling impact of compound interest. I’ll discuss retirement accounts in greater detail in a future post. For today, suffice it to say that any money you legally protect from the tax man is money in your pocket. Learn about tax-advantaged and tax-deferred options you have in your country. Your future self will thank you.
I hope you’ve learned something new and practical in this post. What savings goals do you have in the next six months? Setting up a Financial Freedom or Periodic Savings Account? Shoring up your retirement account? Or maybe you need to set aside cash for an upcoming vacation or a new computer? Whatever your goal may be, I’ve created a Savings Challenge Worksheet that will help you achieve your goals with more clarity, enthusiasm and fun.
Sending you dear blessings for a beautiful month of May and growth in your Savings,