Nature or nurture?
My parents raised four kids on a school teacher’s salary. While I was growing up, saving was not a topic of dinnertime conversation. In my case, it could have been nature, nurture, or any combination of the two—I was not a natural saver. As a child, I spent my allowance…I didn’t even have a piggy bank. As a teenager, I opened first a checking account, then a credit card account, never a savings account. As a young adult, I lived right on the financial edge, lying awake at night wondering if I’d be able to juggle my paycheck to cover all of my bills. The only thing that kept me from trading in my MGB for a 1969 Jaguar XKE with a V12 was that I could see that even if I gave up eating I wouldn’t have enough money left for an oil change. It didn’t hurt that the XKE was an automatic (this was way before the Internet, so the car in front of me was the car that was available). I led a charmed life and got away with all of this, which set me up to keep doing the same.
Cash flow turns positive
In my 30’s, there was grad school to pay off and a sailboat to buy and outfit, neither conducive to saving, despite my attractive salary as an institutional investor. Anyway, my employer was putting money into my pension fund. Didn’t that cover “saving for retirement”? When I transitioned to being self-employed, running a sailing vacation business in the Virgin Islands with my partner Ron, we did put money into IRAs. This saving was mainly motivated by my desire not to pay any more taxes than necessary. Believe it or not, in the days before cellphones and widespread Internet access, when you lived on a sailboat and took people on sailing vacations for a living, the opportunities to spend money were few and far between. We spent money on our guests and for the business, but rarely on ourselves. For the first time in my life, income regularly exceeded expenses.
My moment of truth
Even when you have an MBA and finance is your thing, you make the same mistakes as everyone else…they’re just more embarrassing and harder to explain away. I couldn’t stand seeing a pile of cash earning virtually nothing when the stock market was running wild. So I invested it…in tech stocks…at the height of the tech bubble. Within a year, we had lost more than 50%. Coincidentally, we were also ready for a life makeover. We gave up the sailing vacation business and sailed back to the US to plan our next chapter. We needed our “savings” to cover our expenses. Not only did we buy at the top of the market, we had to sell at the bottom of the market—oops! That hurt financially, but it also hurt my pride to make several compound foolish mistakes by ignoring time tested truths:
• Keep an emergency fund that is liquid (accessible and free from market risk)
• Match your investment time horizon to when you’ll need those funds
• Diversify—use low cost mutual funds and ETFs (exchange traded funds) to invest in a variety of companies and industries.
The Demise of the Reluctant Saver
Did I mention that I’ve led a charmed life? We were fortunate to get our new, North Carolina-based, lives up and running before we ran through all that remained of our savings. While our tech stock debacle was still recent enough to sting, we started saving for future emergencies. It wasn’t a lot, but we followed these two rules:
1) Pay yourself first! Paycheck comes in, savings goes out, before anything else.
2) Make it automatic. By having an automatic draw set up immediately after payday, we always pay ourselves first.
For one who became a saver later in life, it was surprising how good it felt to see the emergency fund grow. Nice to know that when the car breaks down you don’t have to charge the repair to a credit card! And, as impossible as it may seem at the outset, you will see the day when you have the recommended three to six months of living expenses saved. You’ll be thrilled by the sense of freedom you’ll feel, and the peace of mind!
Need help planning your own transformation? Give me a call at (336) 701-2612.
