WHY A FINANCIAL PLAN? STEP FIVE: SAVINGS & ACCUMULATION
Save, save, save, we all know we should be setting some of our hard-earned money aside. Yet most of us are not doing so. With the ease of credit card use and the loose financing available, many of us are living as if we do not need to save. We can pay as we go. What happens when the cash flow train stops? What will you do when the cheap and easy credit is no longer there?
This reality is coming sooner than you think. And then we will all need to have some liquid cash on hand available for those unexpected purchases we will have to make. I have available a couple of different calculators this time. Let us start with the simple accumulation goals.
Basically, you decide upon something you wish to purchase in the future whether it be a year or two out in the future, five to ten years for a more substantial purchase, or the ultimate goal of retirement. Yeah, the one I am always going on about. This time let us shoot for a modest car purchase of $20,000. I know what you are thinking; I can finance or lease a car and invest the difference. The reality is 99% of us never invest the difference. A better perspective that I try to keep in mind is a quote a friend of mine repeated of his grandfather who was a farmer from Brady Texas, in fact, his name was Brady. He said, “Never pay interest (borrow) on a depreciating asset.”
Now if you think about it you are in reality paying twice as much as you should long-term for the car you financed. The car cost you interest and the loss in value for the depreciation. It is far better to pay cash for a car and drive the wheels off of it. By the way, I have not had a car payment for over five years. It is soooo nice! Anyhow, if your goal is to have $20,000 put aside for a car and assumed a 9% rate of return with a 3% inflation factor over a five year period, the $20,000 would need to be $23,185.48 adjusted for inflation. Your monthly savings amount would need to be $305.11 per month for five years. If you run your finances this way, you would have the cash available to buy the car outright and immediately begin saving for the next car five years from now. Also, keep in mind that you would have some value in addition to the $23,185.48 that you accumulated for the next purchase. If five years is too long you can most certainly shorten the period and increase the savings amount.
If you apply this financial thinking to everything you do and have multiple savings pockets like:
- College savings
- Car purchase
- Home down payment
- Stereo system
- Swimming pool
- Emergency reserve fund
- Any other large purchase you may make
You will be much farther ahead of most everyone financially. We all can agree that when we see or know of someone who can plunk down cash for a new car without borrowing it, we deep inside have great respect and desire to be like that person. We may even be jealous. I want to challenge you to begin to make the mental financial shift. I want you to set a goal, any financial goal, no matter how small. Set the goal and begin saving for that goal. Make others jealous instead!
I have a couple of free giveaways available to those of you who are up to the challenge and would like to learn more. I have borrowed some lists recently publicized for your use. In the famous words of Milton Burl, the comedian, “A comedian who uses another comedian’s joke once is a thief; a comedian who uses another comedian’s joke many times is doing research.” I hope you find this information helpful.
Corey N. Callaway
Investment Advisor Representative