As anyone who has ever tried to start a business, or has encountered significant unanticipated expenses, or had to endure a gap in employment before starting a dream job can attest, savings are the lynchpin of financial independence. Savings are what allow for investment in new business ventures or income-producing property, a prerequisite to home ownership, an investment portfolio, or paying off debt.
When it comes to living a life free from stress about money, the conversation begins and ends with savings. The challenge, then, is how to grow a nest egg – or a war chest, for entrepreneurs among us – by gradually putting away more and more of our hard-earned money. While this can seem like a daunting task to anyone living paycheck-to-paycheck, what follows is a brief list to set you on the right path to financial freedom.
1. Pay Yourself First
Savings and investment plans are everywhere, and the statistics on people who use these programs in a dedicated way are quite poor. For many, though, the best aspect of these programs is the ability to have a pre-determined portion of their paychecks automatically transferred in on their behalf. What better way to save than simply denying yourself the ability to spend everything you make?
While deferring just 2% to 4% of a person’s weekly income may not sound significant, this small continuous amount can grow significantly over time.
2. Pay Down Debt Strategically
The vast majority of working-aged people in developed nations have debt of one kind of another. It might be student loans, credit card debt, car payments, or myriad other things. The important things are to be aware of how much debt we have and make sure to keep up with the payments to avoid accruing late fees or additional interest.
Once we have a firm handle on what we owe, we can prioritize it for paying down as we’re able. It’s best to start with the highest-interest debt first, typically credit cards. Be sure to compare cards; it can even be a good idea to look for a new card to consolidate balances at an introductory rate. Just make sure not to build the balance back up once debts are paid down.
3. Build Outside Income
Astute investors recognize that one of the most effective tools in creating wealth is compound interest – making money on previous gains.
The key to employing this tool is to start investing some of our savings so we don’t just accumulate cash, but assets that help grow our savings even further without requiring more work from us.
4. Consider Buying Over Renting
Home ownership can seem like a pain in the neck when it comes time to rake leaves, shovel the driveway, or pay for a new water heater, but owning has its advantages. First, it allows us to build equity in property that, ultimately, we can recoup through sale of the home. This is opposed to renting, where money spent is gone forever. It’s true that home prices don’t rise every single year, but anyone who is able to hold property through a downturn should consider buying if they feel they have the wherewithal to do so.
When looking towards buying, though, it’s important to remember that mortgage payments won’t be the only outlay; there will be taxes, insurance, maintenance, and most likely some necessary improvements over time as mechanicals wear down.
The road to financial freedom is rarely straight; twists, turns, breakdowns and detours are all typical. The primary aim of anyone getting started on this journey is to increase savings any way they’re able. Over time, paying down debt and putting away money begin to have real effects on our personal balance sheets and, hopefully, our ability to sleep peacefully at night while living happier, healthier lives.