The beginning of a New Year is always a great time to have a look at new ideas.
It’s not so much about resolutions as having a fresh start, there is a natural affinity between the first few days of January and using this as a time to make some changes.
In our new Book “The Wealth Secret – Create, Build and Protect your Future, The Penguin Way” (being released soon) in the very first chapter we point out – in financial planning terms – one of the key secrets of great financial management is a truism that has held for centuries, that has always been the case and is a bedrock of understanding how wealth is created.
It is the concept (and however simple this is, it is one that can cause a great deal of head scratching, despite its simplicity it’s still not always easy to grasp) of “people tend to spend at the rate they earn”.
Now at first glance, this may not seem especially insightful. But looks can be deceiving! This straightforward thought does, in fact, hide a crucial element. If people spend at the rate they earn this must mean, by implication, spending is elastic! And if spending is elastic then this suggests that the average person can spend less. Because if they were to earn less they would spend less.
This is part practical, part psychological. Everyone needs to pay for certain basics, food, clothes, electricity etc. but beyond this, the rest of the spending is going to be dictated by income. Find ten people with different incomes and you will, in general terms, find ten people with different expenditure patterns/habits and these will be directly correlated to their incomes.
As suggested this is a basic concept, but not as intuitive as it may seem, because once you grasp that, generally speaking, expenditure is dictated by income and that expenditure is elastic, then you can start to see that those people who create wealth tend to spend proportionately less and save more.
The key word above is ‘proportionately’ – in this day and age of Easy Money, the idea of frugality is seen as old fashioned. We are not, though, proposing that frugality is the answer. What we are proposing is that every person serious about wealth creation should have a financial plan which has a serious commitment to saving. There is a difference between disciplined saving and frugality.
There is no need to go on the financial equivalent of a starvation diet and rein back on all expenditure; but there is always room for adjustment, to rebalance between expenditure and saving. With help, you may be surprised how much can be achieved.
The key is that nearly all people we meet can save more. And wealth creation starts with having a savings habit, putting aside a proportion of one’s income on a regular basis and in a disciplined fashion, to build wealth. And once this is done then the savings can be made to grow. The combination of regular monies put aside and investing the monies well will produce great results over time.
Our first tip for the New Year is to REVIEW YOUR INCOME/EXPENDITURE PATTERNS, EXAMINE HOW MUCH YOU ARE SAVING AND WORK OUT WAYS TO SAVE MORE. AT THE SAME TIME, LOOK AT WHERE YOU ARE ALLOCATING YOUR SAVINGS, ESPECIALLY FOCUSING ON THE RETURNS YOU ARE GETTING ON YOUR MONEY.
This combination of actions is a powerful mix.
If you can save a little bit more, get better returns and change your patterns, you will make a big impact on your long-term results. It may be a small step to take now, but one that ripples into big effects later down the line.
If you wish to discuss this, along with your overall Future Planning, please do get in touch
HAPPY NEW YEAR