Seems like every time I turn around one survey after another is asking me about my income. Even my church seems to care how much money I make! I find it amusing that not once in the past 43 years have I ever been asked how much money I save. And – at the end of the day – isn’t that a more relevant number?
It’s time to stop thinking only about the amount of your paycheck and start thinking about how you can put those dollars to work building your net worth. By definition, net worth equals your assets minus your liabilities. Simply put: it is what you OWN minus what you OWE. I believe Benjamin Franklin described it best when he said, “Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.” Don’t underestimate what taking away one bad habit per month can do!
Are You Living Without A Financial Safety Net?
According to Bankrate.com, approximately 75 percent of Americans are living paycheck to paycheck with little to no emergency fund. Not only are they walking a fine line between financial ruin and survival, but they are also creating a self-fulfilling prophecy that will have them working until their very last breath. It doesn’t have to be this way! All it takes is a new lens to see what your money can do for you if you simply give it the chance. Rather than bore you with mathematical formulas or fancy financial lingo, let me just say this: if you do your part your money will work harder – for you – than you ever imagined.
So what’s your part? It’s simple and you can start right now by finding as little as $3.50 per day, $25 per week or $100 per month in your budget. I know many of you believe you can’t tighten your budget a single cent. I am here to say that you can by practicing discipline, being patient and staying focused on a longer-term goal – financial freedom and independence. All I am asking is that you say “no” to at least one bad habit. It’s simply putting down your credit card and saying “no” to the temptation of an extra shopping trip to Target, one too many nights out with friends, or a shoe binge at Nordstrom’s – and I must confess, I too like Jimmy Choo!
How To Turn $100 A Month Into $260,000 In Savings
Let’s assume that starting at the age of 25 you took that $100 per month and opened an IRA account that allowed for retirement savings with tax-deferred growth. Let’s also say you invested that IRA in an S&P Index Fund and consistently did this – month after month, year after year – until retiring at the age of 65. The results are surprising. That mere $100 each month over 40 years totals $48,000. Not too shabby. However, because of a little gift called Time Value of Money, the balance in your IRA account would amount to almost $260,000! Beautiful, eh? Sure, you worked hard for that $48,000 but not nearly as hard as that same $48,000 worked for you – it generated almost 4.5 times more money.
Now imagine the impact of cutting out two, three or four bad habits per month – perhaps even saving enough to invest the maximum allowed in an IRA each year ($15 per day, $458 per month or $5,500 annually). Using the same variables, your new balance in that same IRA account could amount to as much as $1,175,000. Yet, the total dollar amount that you actually worked for was only $220,000. Pretty cool stuff!
It’s Never Too Late To Start
Okay, I hear you saying, “Not everyone is 25 and has the luxury of time on their side.” You actually have more time than you think. With the average life expectancy of women in America today at 81 years, there is still a lot of muscle left in your dollar. And there is no time like the present to put your money to work.
Step One: Open up an account. (IRAs have tremendous tax advantages and are terrific retirement vehicles, however, the same math can apply to investment accounts with a bit more liquidity.)
Step Two: Set up monthly, automatic withdrawals. The actual amount you invest isn’t the most important factor – it’s the commitment to be consistent. Not only do monthly contributions eventually add up, they enable you to effectively ride out fluctuations in the market. This is the Dollar Cost Averaging principle and a proven technique designed to reduce market risks.
Step Three: Be disciplined, focused and patient. A significant increase to your net worth doesn’t happen overnight. Just as in Aesop’s Fables parable of The Tortoise and the Hare, slow and steady wins the race: remember your long-term goal of financial stability and freedom.
We all face the temptation to fixate on the dollar amount of our paycheck. Despite our best efforts, many of us allow that number to define our worth. We complain when it is low or become complacent when it is high. This is a waste of time because we are worth more than the number of zeros printed on a check. What matters is what we do with those digits – and what we allow those figures to do for us. I am not a D-I-N-K (Double Income No Kids) or a S-I-N-K (Single Income No Kids). I am just a single mom with a double income and three kids. My first income is from my paycheck. My second comes from managing that paycheck by eliminating one, small bad habit at time. True financial freedom doesn’t happen until your money actually starts to be put to work for you!