Are you saving like a moron? Because if you are, you are never getting rich. Here are the top 5 mistakes that might stand in your way of getting rich by saving.
Saving mistake #1 (read carefully)
If you had ten buckets to fill with water, using only a cup, how would you do it? Fill the cup, then pour a little in each bucket from 1 to 10? Or pour the whole cup in bucket #1 again and again till it’s full, and then move on to #2?
(Well duh. Of course you’d work on a single bucket.)
Yet when it comes to saving, people do it exactly the WRONG way. They go for what I call “parallel saving”, meaning they try to spread the cup between however many buckets they have. They simultaneously contribute to a car fund (€250), vacation fund (€100), Christmas fund (€50) and so on.
That’s a total of €400 a month. And it’s getting you nowhere.
Suppose your car fund goal is €2400, vacation goal is €800, and Christmas is €300. Instead of going parallel (€250-€100-€50), go focused. Dedicate all €400 to the car fund and in 6 months, you’ll have a car. Then dedicate all €400 to your vacation goal and you’ll be done in just 2 months. And 1 month for Christmas.
Whereas, if you go parallel (€250-€100-€50), you will need 10 months for the car, 8 months for vacation and 6 months for Christmas.
Imagine going parallel on those buckets on a super hot summer day, pouring a bit of your little cup of water into each bucket. The longer the buckets stay there waiting to be filled, the more water evaporates. But focus on just one single bucket, and you will lose less water to evaporation.
Remember: the longer you keep cash before you convert it into a purchase, the longer your money is exposed to inflation.
Since the prices of most things tend to gradually go up, it’s generally good to buy now rather than later. But what about the things that might get cheaper? Well in that case, it still pays to go for focused saving, and you can put the leftover money towards the next item on your list. Focused saving is also a boost for you to stay motivated, because you get your rewards sooner.
Saving mistake #2: Dumping money into junk
Years ago I was working as a sales agent for an ice-cream company. The HR manager was showing me around the factory as part of my employee introduction plan. We were passing by some sinks and she said “Ima show you the coolest thing ever, Rya. Look at that” – she put her hand under the tap. The water started running without her touching anything. “We had to get those sinks in order to get ISO certified,” she explained, then sighed. “So much money locked into… sinks. They are cool but they don’t earn us a dime. These sinks are worth half a production line. Production lines would have made us money.”
People often put the biggest effort into saving for things that don’t generate revenue. Cell phones, flat screen TV, clothes, cars – you buy those things because they are fun. But “fun” doesn’t pay you back. To get rich you need to buy the boring stuff like land, stocks or real estate.
It was a long time ago when Kiyosaky stated an obvious truth: “The poor buy liabilities. The rich buy assets.”
But not everybody was paying attention.
Saving mistake #3: Too much cash
I’m sure you’d enjoy swimming in money Scrooge McDuck style, but keeping your savings in heaps of cash is a terrible mistake. The interest rates on cash deposits are usually pretty low, just above the inflation rate. (Example: bank interest 6%, inflation rate 4.5%, return on your money = 6 – 4.5 = 1.5%. A return of one point five per cent is not making you rich unless you live for 500 years.)
Cash is nice in reasonable amounts: six months’ worth or a year’s worth, tops. So instead of keeping too much cash in the bank, convert some of your money into something else that will not depreciate in value,
Better yet, use that cash to secure a stream of passive income – even if the stream is more like a trickle. If you let that trickle run long enough in your pockets, sooner or later you’ll have a pond. And if it never stops running, it will be a nice gift for your kids someday, too.
Saving mistake #4: Too little cash
Michael Jackson, in his late years, was asset-rich but cash-poor. He had millions’ worth in real estate (Neverland alone) but poor cash flow.
Real estate, art, or other possessions count as assets as long as they bring you money. If not, they are just a drain because you have to pay taxes and maintenance fees on them.
When the market is down, you might be tempted with amazing deals – properties that were €50 000 just a year ago now sell for €25 000. And if your combined savings total €25 000, you might get excited about putting all your cash in the deal and wait for the market to rebound.
Never put all your cash in one deal. If you have €30 000 in savings, then you can go for the €25 000 deal because you’ll still have €5 000 left in cash. Otherwise you’re running a huge risk, especially if the property is unrentable and you only hope for the “buy low sell high” gig.
The greatest thing about money in cash is that it’s liquid, meaning you can easily exchange it for something else. Diamond rings, on the other hand, are not so liquid, because using the diamond’s value to buy something else, like a car, will take you a lot of time because first you’ll need to find a buyer for that diamond before you get the cash. So if emergency hits, and you don’t have enough cash on hand, you are at risk of getting into debt.
Cash is fast. Always, always keep easy-access cash.
Saving mistake #5: Did you forget home improvements?
When it comes to finding a safe hollow to squirrel away your savings, your first thought should be getting a good return on them. That way you are using your money to make more money.
And your second thought should be home improvements.
(Flat screens and Persian carpets don’t count, so stop wiggling your behind on that victory dance. You look ridiculous, you know that?)
You can justify putting your savings into home improvements as long as they save you money or time. For example, if you pay €3000 for thermal insulation and your heating bill drops by €100 a month, you can count that as a 3.33% return for each winter month. So if you save €600 a year thanks to insulation, you have a 20% return on the €3000 you paid. And that’s not even counting the summer months when you’ll save on the air-conditioning bill since insulation will keep your place cool.
The same goes for buying energy-efficient appliances or installing a gas system.
You also get a free pass to use your savings and make home improvements that save you time: replacing old tiles with new ones which are easier to clean, or pouring cement on your driveway so you don’t waste half an hour getting the car out when it rains and that packed dirt turns to mud. The more time you have, the more money you could potentially make.
Bonus tip: don’t get greedy
Perfect is the enemy of the good. Don’t spend too much time researching your investment options or else you’ll get analysis paralysis – meaning, you will feel overwhelmed and unable to decide which choice is best.
Yes, I know you drool over the possibility of getting a 10% return on your savings. But you know what? The biggest factor of how profitable your savings will be is NOT the return rate and it’s NOT the amount you’ve saved. The biggest factor is TIME so the most important thing is to start saving very early on.
You and your money will be better off if you invest now, even with average returns, than if you waste a year of not investing your savings while you’re looking for the best return rate.
And of course, the biggest mistake in saving is not doing it. That’s just plain stupid. If you are one of those people…