By Paul Nixon
In 2014, popstar Rihanna sued her financial adviser Peter Gounis for “allowing” her to squander $9 million that nearly resulted in her bankruptcy.
His quip in response to the lawsuit was priceless: “Was it really necessary to tell her that if you spend money on things, you’ll end up with lots of things and no money?”
Conversely, lifelong petrol attendant Ronald James Read was such an ardent saver that he had accumulated a net worth of $8 million by the time he died at the age of 92. I often think of these stories when asked about saving.
Saving is a fundamental part of building wealth. Even the most modest salary can build wealth for an individual with the right saving habits, and even the highest-paying jobs can’t prevent you from going bankrupt if you don’t have a savings plan.
Wealth comes from not spending on things or possessions – wealth is not a function of income, but of saving.
Few things are as counterproductive as waiting to save until we earn more. Most people are very surprised to see just how much they can save.
Thus, the first step in creating wealth is creating “space” for saving. There is a deceptively simple rule – the 50/20/30 principle. No more than 50% of your income should be spent on contractual obligations (home loan, car repayments, cellphone etc.). Then, at least 20% of this income should be spent on savings. The remainder can then be spent on discretionary items like clothing, eating out or holidays.
Note, that “savings” is second on the list, so if you’re spending more than 50% on contracts, this should not be at the expense of your savings but rather your discretionary spend.
It is important what you do with the money you save. Bank accounts are good for saving money, but think about how your money can be set aside in a way that will beat inflation. Equity-based investment vehicles can protect the buying power of your money over the long term. Investing builds wealth, and if done correctly, may supplement and eventfully replace your primary source of income.
Lastly, keep your eye on the bigger picture. A goal will keep you motivated – retirement or maybe a dream home? A goal will help you to avoid spending. It’s never too early to begin saving – the only challenge is getting started. As soon as you embrace the savings mindset, you’ll be astounded at how easily you can start building real wealth.
Paul Nixon is the Head of Momentum Investments Behavioural Finance.
The Star