Savings Story: Building Capital

One of the basic tenets of any investor is that you need to create a capital base on which you can found your investing. Yet how can you do this when there’s never any money left?

I have tried this solution and it seems to work quite well. One top technique that many people use is the saving money first rule.

How this works: before you pay any money to anyone, you put some of the money that you were going to spend in the bank or a place that you cannot get it. From the remainder, you pay all your bills, etc, as normal.Things to remember when you do this: Don’t be too ambitious in the amount – you need to be realistic in order for you to be successful; make sure that the money is in a place you can’t get it easily (an account without an ATM card, for example); and do it regularly to have the biggest effect.

Why does this technique work? Actually, we always put savings as a TOP priority, but then we try to save LAST, ie. what’s left over. This inverts the apparent priority of savings, by making it TOP priority. Secondly, it is effective because it creates an APPARENT shortage of cash. In other words, we have to make do with what’s left over, because it simply isn’t there any more. Thirdly, by being a regular activity, it becomes a habit, and we get used to the new status, so we forget that we had MORE money by making do with LESS.

This is also an effective technique when extra money comes along. Bonuses and pay raises come along as a surprise usually but pretty quickly they feel like normal. We get used to having a bigger pay check. Soon we find we just simply spend more than before, and we’re back to square one! But using this technique, extra money can simply be locked away out of habitual spending’s way!

Any feedback on this article would be welcome. Obviously, if you have a lot of credit card debt, you should seek first to eliminate that rather than be investing.

Best Wishes Kenneth

The Money Book for the Young, Fabulous & Broke