"Income + Less Spending = Saved Money" is a recipe for disaster! Here’s why…

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: In a past “The Independent Investor” article, we talked about the first step to financial freedom: Make Money. This is one of the four steps that Valens Research President and CEO, Professor Joel Litman, discussed in his “Build Your Financial Future” webinar. Just a quick recap: In that article, we talked about the biggest engine of our wealth―our careers―and why we should prioritize that over other possible sources of income. Today, we’ll focus on the second step to financial freedom, which is about saving money. Continue reading below to know what it truly means to save money and gain additional tips on how you can balance spending and saving your funds. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

"Income + Less Spending = Saved Money" is a recipe for disaster! Here’s why… Income + Less Spending = Saved Money Many people think about this formula whenever they think about saving money. This is what some parents even teach their children at a young age. Technically speaking, the formula is correct. When you receive income and then spend less, you save money in the process. However, according to Valens Research President and CEO Professor Joel Litman, the formula above is a “recipe for disaster.” If you want to achieve financial freedom in the long run, you have to understand what “saving money” truly means. In his “Build Your Financial Future” webinar, Professor Litman said that some of today’s US multi-millionaires who did not start out as multi-millionaires came to be because of one common factor: They had a focus on the principle, “I have income, I save money, and then I spend.” How does this differ from the formula above? In this principle, there’s a balance between spending money and saving money. Just because you have to save your funds, that doesn’t mean you have to extremely spend less. That’s why Professor Litman said the previous formula of receiving income then spending less to save money is a recipe for disaster! Managed spending is also essential so you can provide for your and your family’s needs. He also stated that you ought to be teaching your children the same thing (if you’re a parent): “I have income, I save money, and then I spend”―meaning, when you receive your income, you dedicate a portion of it to your savings or investment plan. Then, whatever portion of that income is left is all you have to spend. This, according to him, is the path to success. Besides, wouldn’t you want to achieve financial freedom without having to put too many restrictions on your spending? We bet you would! Here are a few more tips to properly balance spending today and saving for your future: Know your numbers. To make better decisions on how to allocate your money on spending, saving, and investing, you first need to know what your financial life looks like. Ask yourself: “Where do I usually spend my money?” “How much do I save?” “On which accounts do I distribute my money for savings?” You have to know your cash flow on a close level and track how much of your funds come in and go out. You’ll see, answering these questions will help you understand if you need to save more money to achieve your long-term goals… or if you have wiggle room to spend more on various items. Envision what you want to achieve or do in the future. To motivate yourself to spend and save money wisely, you need to have a vision of what you want to do 5, 10, or many years from now. … and while doing this is easier said than done because you don’t know what the future looks like (no one does), one thing that’s certain is this: Your life will still cost you money in the next few years. If you’re not saving money as early as now, you might not have enough to spend in the future. So, wisely allocate your income every month. Make sure contribution to your future goals happens and once you’re done with the savings part, you’re free to spend the remainder of your income on what you need―or want―in the present. Develop a financial plan then follow it. Your financial plan is a document or archive (digital or hard copy) that you should continually update as you make progress, reach new milestones, and redefine your goals or timelines. If you want to effectively balance your spending and saving, you must develop your personal financial plan then make sure to follow it. This will guide you as you make decisions about how much you need to save for the future and how much you can spend today without worry. Redefine your personal “balance” over time. As you move forward in life, your priorities will change. You will change too… and that’s normal! There’s nothing wrong with redefining your goals and priorities over time. However, you have to be mindful that shifting your financial goals from your originally stated plan might require you to make tradeoffs. Acknowledge tradeoffs that have to be made, if there are any. These changes are valid and only you can define what your personal balance between spending and saving money looks like. With income moving around in your lifestyle, it’s important to set goals and guidelines for how and when you’ll spend your funds. Sure, you may have a lot of choices to make and goals to achieve, but only a limited amount of money to use on those things. The key to solve that concern and be more financially stable? Find the right balance between spending for a short-term goal and saving for a long-term goal! … and remember what Professor Litman said: “I have income, I save money, and then I spend.” Keep these tips in mind as you plan your next set of actions to achieve financial freedom! Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn.     Stay tuned for next Wednesday’s The Independent Investor! The Town Mouse and The Country Mouse. Learn more about how you can use fables in the context of investing in next week’s article!