Most people have heard the saying: “You have to have money in order to make money.” Essentially, that statement describes an investment, a stake, or more accurately, capital. Unless you were born to a wealthy family, a family that practices disciplined conservative investing, or unless you were blessed by some windfall of unearned income, the time that you have to live your life is likely your best asset with which to do more than struggle to earn enough money to pay for your family’s needs and wants.
Where Does my Money Go?
You work hard at your job, and such monetary compensation that comes your way is earned income. What will you do with it? Most people intuitively grasp (or they learn by hard experience) that you must pay for food and shelter first. The vast majority of people who must work to earn a living are compelled to rent their shelter when they are young, and they find that the cost of rent uses a significant portion of their earned income. Out of this situation, the idea of buying (vice renting) shelter (a condo, townhouse, a detached house, or even a boat with living space) is born. However, there is a competing cost that is in play. Unless you rent shelter that is close enough to permit you to walk or bicycle to work, or you travel to/from work by public transportation, you will convince yourself that an automobile (car or motorcycle) is also a necessity. The newer, larger, more powerful, or the more trendy automobiles will put a significant dent in your paycheck due to their higher price, higher cost of an auto loan, higher insurance cost, and because the municipality in which you rent your shelter will tax your auto (property tax) at a higher rate. While you are young and starting in the workforce, add to the cost of food, shelter, and transportation the additional required costs that are peculiar to your situation: one or more young children (additional food and clothing costs), a disability (additional medical costs), a responsibility (caring for aged parents, a hard luck sibling, or other person), or a debt (education tuition), and now there is little left for you to save. You don’t have any lazy money. You don’t have any money at all.
Why Did All of my Money get Spent?
There is an easy answer to that question. You don’t know what you are doing. You are not running your life. Life is running you. Some people call that “living in the moment.” What does that mean? Does that mean dying in the following moment because you spent all of your money? You and your family must strive to live somewhere safe and you must eat. After that, you could decide to live slightly below your means (divvy up the remaining costs so that you will have money left in your checking/savings account). This is a difficult undertaking for people who were not taught to do this and is is especially hard for vain people. Most of us have some vanity. It usually comes out in how we want other people to perceive us to be. There is virtually no end to the number of products and services that are put in front of us to tease out our vanity. You can stop reading this article right now if you will not be honest with yourself about what is your vanity and entertain the idea of controlling it. Whatever your situation, if you will write down ideas on how to live slightly below your means, you will have extra money. Then, you can plan on what you will do with it. The younger that you are, the more that the element of time will aid you in meeting goals that you set for the use of a monthly growing cache of extra money.
What is Lazy Money?
Lazy money is excess money (savings) that does not earn a reasonable return. Economists point to inflation (a measure of the average cost of living for people in a given country) and advise that your savings must regularly earn more than that or you are not in fact saving. The idea is that if your money cannot earn interest or a dividend that will account for rising costs, you will net lose when you spend your savings to pay for things. As of July 2014, since interest rates are so low, generally, one cannot save in a bank, savings and loan, or credit union interest-bearing checking account or savings account and get an interest return that will keep up with inflation. So, money put there is “lazy money.” However, it is usually very safe money and it will grow as long as you add to it from the savings that you reap by living slightly below your means. While your saved money grows, educate yourself on ways to get a better return (that are also low risk) with the saved money. My personal favorite is to invest in no load mutual funds with a longstanding reputable investment house like T. Rowe Price. https://individual.troweprice.com/public/Retail?adcode=7208&PlacementGUID=771DB2340349487089DDFF68247CC58A .For that company and for any other investment source, talk with trustworthy friends and family, go online, read the data, and speak with investment advisers of longstanding, reputable, safe investment companies about how to start small, diversify, and how to know when the investment climate has changed, how to sell and move to safety. I know this is a generality, but I want to get to the best part now, which is how can you massively save and use time to grow your saved money quicker. In other words, how can you scale up your means to accumulate lazy money?
Clothes and Other Vanity Products
Before I explain this part, if you are married, realize that you are blessed to be with someone that you love. Don’t screw that up. You are in a partnership, and your partner will not necessarily cooperate with you on financial matters. If you find out that you cannot get cooperation, first seek an agreement on load-sharing of the bills and then get separate checking and savings accounts. In other words, balance the income that you and your partner earn by applying a fair percentage on each income to pay for the cost of shelter, transportation, clothing, food, and other necessary costs. Example: One partner earns $20K per year and take home pay per year is $12K. The other partner earns $40K per year and take home pay per year is $26K. 12 + 26 = $38K available to pay the required costs. If the required costs are $30K, then divide 38 into 30 and see that 79% of your combined income must be spent on these costs. Set up auto-bill payments with your bank, savings and loan, or credit union so that each partner pays a portion of the bills to cover the 79% and that each can have the apportioned 21% that is left. Now, if one partner will be vain with their 21% while the other saves 21%, that is the cost of staying married. But, you both still have shelter, food, and other required needs met. At this point, I will say the word clothes, followed by the words “Clothes Horse,” and selfish. Finally, I will say that feeding vanity robs the entire family and no one really cares what you look like anyway.
Shelter and Transportation
Once you have that worked out, concentrate on shelter, which is the one thing that is most deadly to the concept of saving. Shelter must be adequate and safe. It should be near to where you work (reduces transportation costs, stress, and risk of an auto accident). People get into trouble when they move up from rent and decide that they must: move to the best school district in the area, move to waterfront property, move to the top floor condo with the best view, move to the townhouse complex by the golf course, or whatever extravagance. The next mistake is to buy the new home that is right at the precipice of cost that you can be loaned money, or worse: accept some form of voodoo financing with balloon payments 3-5 years after you buy. All such ideas are counter to living slightly below your means. Think of moving up in shelter like moving up stairs from one floor to the next. You are on the ground floor while you rent. The next step up should be shelter that you will own that is also safe, adequate for your needs, close to work and (with a 30 year fixed loan rate in the low or mid-single digits) has a monthly cost (principle, interest, taxes, and homeowner’s insurance) that is the same as your monthly rent cost or no more than 10% higher (assuming your salary will cover that). Listen, carefully. No, that will not get you exactly what you want, but if you do it, you can reasonably expect to skip some steps on your way up the stairs the next time you move. Be content that you advanced one step up from renting. This is the best part: You own your own home (actually, you will pay a mortgage company until you have paid off the loan. Then, you will own it), and you still live slightly below your means, ie you are saving money. Take a look at the 30 year loan on your new home. Go online and search for a home loan amortization calculator. Plug in your loan amount, the interest rate on the loan, and 360 payments (which is 30 years times 12 months). See how your lender has front-loaded mostly loan interest in the first half of the loan and how the final 8 years of the loan are mostly principal payments (the actual payoff of the loan to the lender). Take a portion of the lazy money that you have saved and make extra principal payments with it! Many people find that they can pay off two additional months on the 360 month loan along with each month that is due for the first five years after they move into their new home. Think about that. It may be well within your savings and the rate in which you continue to save for you to pay the monthly mortgage bill (like you used to pay the monthly rent) and also pay an extra principal payment to cover the principal cost of an additional two months, for five years and you will have paid off 15 years of the 30 year loan at the end of 5 years that you live in your new home! Since most people move to new shelter about every 5-8 years. Guess who has the huge down payment to move to the neighborhood with the best school district, the condo with the best view, the waterfront property, etc! This same approach applies to paying off any loan (including auto loans) as long as you continue to live below your means. By the way, sorry that I was so hard on you about the clothes. You look great!