We learned that spending all that you earn will keep you from gaining financial freedom.
We learned that spending more than you earn especially with the use of credit cards is
even worse. The key to financial freedom is to spend less than you earn. You must learn
how to manage your money better, so that you can put some aside for the future. All I can
do on this page is to give you a limited overview of some of the key principles. For me to
cover everything, I would need to write several books. I recommend that you increase your
knowledge by consulting some of the many good books written on the subject.
Let's say we are just starting out. What are some ways of getting money. Well you could
inherit it but most of us don't have a crazy old rich aunt or anyone else who is who is going
to leave us a lot of money. You could win the lottery or hit it big at the casino. I don't
believe that would be a reliable way to get money. As a matter of fact gambling is a good
way to get deep in debt. The way most of us get money starting out is by working for it.
There are better ways to get money like earning interest on savings or return on
investment and we will learn about them. But working for money is the way most of us have
to start out. Before we can start working on building a nest egg for financial freedom, we
have to save some of what we earn.
Pay Yours Self First
You decide to start saving. What you will do is save what ever is left after you take care of
all your monthly bills and living expenses. Or you will start saving as soon as you pay off all
your debt. If those are your plans for saving you will never save a nickel. What you have to
do is pay yourself first. Before you take care of any other obligations, take some money
from that paycheck and save it. The best way is to have it automatically deducted from
your paycheck, if you can. You have to pretend you don't even have it in the first place
and work on your living expenses and debt reduction with the rest.
When it comes to spending money there is necessity and there is pleasure. We are not
saying that you shouldn't spend any money on things you don't need but make sure the
pleasure they bring you is worth it. Eliminate some or find some that you enjoy that cost
less. Whatever you spend your money on, make sure you are getting the best value.
There are just so many ways to spend less and still have a good. When you spend less,
you save more than the money you didn't spend. Most States have sales taxes on the
dollar amount that you spend. They haven't figured out a way to tax what you don't spend,
so that's additional money that you save. If you have savings you are more likely to pay
cash for short term wants and needs, so that you won't charge them. That means you don't
have to pay out extra money for interest.
Loaning And Owning
There are only three things that you can do with any money that you save. You can put it
in your mattress, you can loan it or you can invest it. If you just keep it somewhere handy,
your mattress or a secret place in the cupboard, a thief can steal it, your place could burn
down or even if you get to keep it, it won't grow. You could put it in a bank or some other
financial entity that will pay you interest. A Federally Insured Bank is very safe and it will
even grow a little bit. Money markets pay a higher interest but are not federally insured
like banks. You could buy bonds from the Federal, State or Local government. You could
buy bonds put out by companies called corporate bonds. You are really loaning your
money to the these places. The money they pay you is interest for the use of your money.
Investing is different because you are buying ownership. That's obvious when you buy real
estate or own a business. But when you invest in the stock market by buying stock in a
company. You are actually buying a piece of that company. If you buy their bond you are a
loaner. If you buy their stock you are an owner.
Loaning Or Owning
Is it better to own or to loan. Actually, you need both. The key is knowing when to use one
or the other. Because of the time thief called inflation, you will never earn enough by
loaning to become financially independent. But, you will learn in the next paragraph that
inflation operates over a long period of time. It really doesn't impact short term savings. So
for short term needs loaning is best. Investing will give you that 12% you need for financial
independence but there are some short term risk. It works better over the long term. On
the next page we will learn about investing and minimizing risk but on this page, we are
going to learn all the ins and outs of loaning our money.
The Time Thief
There is a thief that works against your financial independence over time. That thief
doesn't actually steal your money. It steals the purchasing power of your money. It's called
inflation. On the first money page I talked about retiring with a million dollars. A million
dollars isn't what it used to be but it still sounds like a lot of money. Fifty years ago you
could by a house for what cars cost today and you could by a new car for around $1000
dollars. Fifty years from now that million will probably only buy what $250,000 buys today.
The bad news in a million probably won't be enough to retire on. Since Social Security will
probably be broke by that time too, maybe you should get to work building wealth. It can
be done if you have the right knowledge and some time. There is no get rich quick but
there is definitely a way to get rich slowly. We will learn about long term investing on the
Short Term Savings
It takes money to save money. If you have some money saved to back you up, you are
going to be able to pay cash or your monthly balances on your credit cards before any
interest is owed. If you've taken advantage of one of those no interest no payments for a
year deals you will be able to pay it off before you owe the interest. If sales or bargains
present themselves you will have the money to take advantage of them. One thing you
need with short term savings is quick access to your money. The financial term is liquidity.
Another thing you need for any savings is safety. Money kept in the cookie jar or mattress
is very liquid but not very safe. For the beginning saver, you would also like both low
minimum deposit and low minimum balance requirements. You can get all of these in
banks and credit unions. Another place that you can park short term savings is in money
markets. We will discuss all of these in more detail below along with the rate of return or
interest that you can earn in each.
Your local bank or local branch of a major national bank gives you full service, liquidity and
safety for your saving. Their regular savings account also has the advantage of requiring
low minimum deposits and balances. The full services include checking, savings, loans,
mortgages, credit and debit cards to name a few. Access to your funds are as near as the
closest ATM machine. Your money is very safe because the Federal Government insures
each account up to $100,000. The price for all this is a low rate of return on your savings.
Regular savings accounts in full service banks are currently around paying about one half
percent. They do have other accounts with higher minimum balance requirements that pay
more. There are online banks that give you fairly quick access to your money, Federally
insured safety and low minimums that pay around three percent. They can do this because
they have low expenses. They have no buildings to support. The services they offer vary
but are often less than a full service bank. With some you use your full service bank
account to transfer money.
A credit union can give you slightly better rates than banks can because they are
non-profit. You have to join, become a member. You have to have affiliation or something
in common with some group to join. But with family members being able to join and some
credit unions very loosely define group, almost anyone can find one that they qualify to
join. We have one where you just have to live in one of two counties and as we are near
the border even a few towns from the neighboring state. If the credit union is affiliated with
your company or profession than it's very easy to pay your self first by having some taken
from your paycheck and put right into savings. With a bank what you would have to do is
have direct deposit of your paycheck and then transfer some from your bank account to a
Money markets are different than from high yield savings in that they allow limited check
writing. They usually require a minimum balance of at least $1000. A bank money market
account is Federally insured for $100,000 per account just like a regular savings account.
You have quick access to your money. Online banks usually pay a higher interest rate.
Money market funds are different than money market bank accounts. They do have the
limited check writing privilege but are an investment. Though fairly safe, they are not
Federally insured. They may pay a slightly higher rate of interest.
Certificates Of Deposit
For money that you don't need right away banks offer CD's or certificates of deposit. They
are Federally insured like other bank savings. These have minimum deposit requirements
like money markets. They earn higher rates of interest currently better than 3% but you
have to agree to keep it there for a year or more. You can withdraw your money early, if
you need it but the early withdrawal penalties make them a bad choice for saving if you do.
There are CD's with terms shorter than a year, but they pay have a lower interest rate.
Right now the one to two year CD's have interest rates as good as or better than the very
long term CD's. This is because banks are afraid interest rates will go down and they will
be stuck paying out the higher rates to long term CD holders. This isn't always the case
and sometimes the longer term CD's offer higher rates. Some people ladder their CD's so
they will always have some money available. They buy them at different times or for
different terms so that some are always finishing their term on a monthly, quarterly or
The final topic that I'm going to deal with under savings is bonds. The Federal
Government, state governments, municipal governments, corporations and various other
entities borrow money from us, the public, by issuing bonds. Bonds have a face value and
are issued for a time period or term. They are issued in fairly large denominations and
increments of $1000 or more. Most are marketable. They can be sold on the bond market
the day after you by them. They can be held in mutual funds. Those issued by the US
Treasury are really safe with the full backing of the Federal Government. Other bonds
have varying degrees of safety and are rated as to quality by three different rating
agencies. One of the things that will determine what you can get for your bond is it's
quality. A second thing that will determine the price of your bond on the open market is it's
rate of return. If interest rates go up then new bond issues will have a higher rate of return.
You would have to sell your bond at a discount off face value to make up for it's lower rate
of return. Of course if you hold your bond to maturity, you get the face value. If interest
rates go down there are other issues. Your bond may be callable. That means the issuer
will call the bond in and pay you off so they can issue new bonds with lower rates of
interest, so you lose that great rate of return you were getting.
US Treasury Securities
The US treasury issues notes and bonds to finance the Federal Governments long term
needs and US treasury bills for short term needs. The US Treasury even issues a bond
which adjust for inflation so you can be secure in knowing that your purchasing power of
your savings will be maintained. If you buy TreasuryDirect from the US Treasury there is
no fee and your securities are safely kept at the Treasury as a book entry. They are
marketable bonds that can be bought and sold on the open bond market. this makes them
very liquid. Of course with the backing of the Federal Government, They are very safe.
Like all bonds they have market interest rate risk. Also they might be a problem for the
small beginning investor. The smallest denomination that you can buy is $1000. For a
complete discussion of US Treasury Securities including tax implications get "The Money
Making Guide To Bonds"
US Savings Bonds
For the small beginning investor we have The familiar US Savings Bond. You can buy
one for as little as $25 dollars. The most familiar savings bond is the EE Bond. It can be
bought at your local bank and is sold at a 50% discount off it's face value. So a $25 bond
has a face value of $50. The Federal Governments put new rules in effect May 2005 so
most books won't have the latest information. The rate is now fixed and will be set for new
issues May 1 and November 1. So a new rate will be set shortly but it's now 3.5% through
October 2005. They are not marketable. You can only buy them from and sell them back to
the US Treasury. You must hold the bond for one year and if you cash it in before five
years, you forfeit the last three months interest. So they are not for short term savings. In
other words they are not very liquid. Your bond can earn interest up to 30 years at the
original interest rate but it can be changed for the last ten years. Current issues are
guaranteed to double in value in 20 years. The I bond is a bond that is set up to give a
return above the rate of inflation. The interest rate is a composite of a fixed interest rate
plus the rate of inflation. So you can feel secure in knowing that you will keep the
purchasing power of your money through the years. The minimum purchase is $50.
There is more to learn about bonds. On this page I'm only trying to give you a brief
introduction. We will discuss them further on other pages. For the best education on bonds
I highly recommend "The Money-Making Guide To Bonds". Click on it's picture in the right
panel. On the next pages we will be talking about more about investing, owning instead of
loaning. But bonds and other types of savings will be discussed as they fit in with an overall
investment strategy. These money pages are currently being revised and expanded so
you will see many changes in he next few weeks.