Moneymentals | Our Blog
- Created on 17 November 2014
- Written by Michael Goldman
I frequently get questions about how to invest and build long-term wealth. If you really want the secret of wealth-building, you have to be prepared for a simple, boring, tried-and-true answer: saving. When you focus on saving, everything else falls into place. Saving isn’t sexy, trendy or glamorous—but it works!
Make Saving a Keystone Habit
Sometimes personal finance seems to be all about trying to extinguish the spending habit. “Stop all that spending!” is the mantra. A better approach is to ask yourself, “What’s the best way I can save more instead?” In his book The Power of Habit, Charles Duhigg describes what he calls keystone habits. A keystone habit is one basic, simple, habitual pattern of action that is significant because it has the power to affect a number of other habits.(1) Establishing one keystone habit brings about positive change that makes an impact on other routine activities as well.
Duhigg uses physical exercise as an example of a keystone habit. People who exercise regularly experience surprising, beneficial changes in seemingly unrelated aspects of their lives, such as eating, work productivity, patience with others, smoking frequency and more.(2)
The keystone habit that you can use to transform your financial life is saving! Just as exercise is a keystone habit for physical well being, saving is a powerful keystone habit for building financial fitness.
Saving is the foundation for all the essential money-management habits that bring financial freedom. Because it has a ripple effect, saving helps you transform the rest of your life as well. Once you’re saving regularly, you start thinking about things like, “How do I invest to make my savings grow faster?” As a result, investing falls into place. Soon you have assets that are important to protect, so you start thinking about things like insurance and estate planning. There’s also a strong relationship between saving more and debting less.
Here’s another way saving can change your life: Saving gives you the money to help you achieve your dreams and accomplish goals that are meaningful to you. You’ll be able to spend in ways that really matter.
A New Perspective
Changing that single habit—saving —will help you think differently, structure your finances differently and make building wealth a regular practice. What does changing the saving habit look like? It’s best to save on a regular, consistent basis. Start small with something “below the radar”—an amount you hardly notice. It might be $1, $10 or $100 a month. Choose an amount that’s easy and painless for you.
Your savings accumulate over time. If you make it automatic by using an automatic bank transfer, it just happens. You don’t notice it, and viola: You’re building the saving habit without much effort. Here’s an example: You could set up a monthly automatic transfer of just $25 a month into a savings account or $100 into an investment account. Soon you won’t miss that money at all, and it will be going into savings automatically. You can increase the amount down the road to save even faster.
Seeds and Fertilizer
If you want to know how to build long-term wealth, think like a gardener. Fertilizer is helpful if you’re gardening, but to grow anything you must plant seeds. As I mentioned in my blog “How to Make Money: Save It,” planting the seeds is saving. Investing just provides the fertilizer that makes your savings grow faster. You might be an investing guru, but if you don’t save and continue to add to your savings, “fertilizer” (investment returns) won’t have much of an effect. However, if you save consistently, your wealth will keep growing even without any fertilizer at all.
After you’ve made saving a regular habit, you can prioritize what you do with your savings. Setting up an emergency fund is a good first step if you don’t have one already.
When I put together comprehensive financial plans, clients who have been good savers are easiest to work with. They’re already saving, and usually they don’t have a lot of debt and know how to live within their means. Saving is something you can begin right now. Make saving a keystone habit starting today!
(1) Duhigg, Charles. The Power of Habit. New York; Random House, 2012, p. 101.
(2) Ibid., p. 108-109.