Sunday, April 18, 2010

Step 1

I meet people everyday who are putting off investing for one reason or another. A very common one is that they feel like they don't have enough money to invest. The funny part is that they shouldn't start with investments. As I wrote about in "Column VS Pyramid" you can't build straight up. People who tell me that they don't have money to invest are right. If they are worried about something like not having money then they still have to start at ground zero. However, a lot of these people are contributing to their 401(k) plans. The problem with that is they haven't built their foundations yet.

If someone is starting at ground zero the first thing they should start doing is saving. I don't know anyone that is successful who hasn't saved 10-15% of their income. That's just what success people do. There are millions of reasons to put off saving, but the fact is that no matter how much someone makes they should live within their means and save 10-15%. If 15% is too much to start out with, then they should start with what they can. If someone cannot do 15% they should start with 5% in a short-term savings account. If they can save 10% then maybe they can handle a short and medium term account; 5% in each.

A person should save in order to create a 3-6 month emergency fund. The point of the emergency fund is to create a cushion for unexpected expenses. If someone does not have an emergency fund and unexpected expenses come along they use debt to pay for those expenses. By creating an emergency fund a person is able to create a foundation on which to build wealth.

I have met several people that want to pay off debt first. I am a strong advocate of paying off debt as fast as you can and staying out of debt. However, I do believe in the principle of paying yourself first. If you are trying to pay off debt and you have an unexpected expense come along then it will only exasperate your debt. However, if you are able to save a little along the way, and create your emergency fund, then unexpected expenses will not get you off track to paying off your debt.

Saving should in no way compromise paying off your debt. Save what you can and pay off your debts as soon as possible. Never let the furthering of someone else's wealth hinder the creation of yours.


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