## Sunday, April 29, 2012

### What do you have to show for yourself financially?

Let's do an exercise:

Step 1.
Write down your annual income.  Then multiply this amount by the number of years you have been working.  It’s a pretty big number right?  This is the total income that you have earned so far in your working career

For example:

If you make \$40,000 a year and you've been working for 8 years, your total income is \$320,000.

If you make \$100,000 a year and you've been working for 4 years, your total income is \$400,000.
Step 2.
Take your total income and multiply it by 10% (0.10).  This is the amount of money that you should have been saving over the last few years.  Let's use the same incomes above for this next calculation:

If you make \$40,000 a year and you've been working for 8 years, saving 10% of your income, you should have accumulated \$32,000 in the bank by now.

If you make \$100,000 a year and you've been working for 4 years, saving 10% of your income, you should have accumulated \$40,000 in the bank by now.

Step 3.
Add up all of the financial assets that you have personally accumulated.  This is the amount of money that you personally earned and then saved or invested:

• Money in the bank (checkings, savings, CDs)
• Investment funds (retirement, personal taxable accounts)
• Home value, vehicle value, and financial gifts or inheritance do NOT count

Step 4.
Now, compare the value you calculated in step 2 (10% savings rate) to the value calculated in step 3 (your financial assets).

How big is this difference?

I would guess that for most of you, myself included, you don't have as much to show for yourself financially as you'd like.  Also, the total amount of money that you have already earned in your career may be a lot larger than you expected as well.

Where did all the money you earned end up?
Did you spend it all on clothing, eating out, electronics, or car payments?
Are you living for the next paycheck?
Are you slowly going into greater amounts of debt every month?

Are you slowly building more personal wealth each month?

This exercise is designed to be a financial wake up call for you.  If you did just fine on the exercise, try the exercise again with a savings rate to 20% or 25%.  If your financial assets are over 30%, it's time to go out more and have some fun.  Go stimulate our economy, as this article is not for you.

It's easy to dispense advice like: "save more than you make!" or "Just try harder to save!"  This is sound advice, but why don't we listen to it?

Things always seem to come up:  "I need to fix my car, I need a new laptop, I'm getting married, we're having a baby, etc."

These things that come up seem to completely drain our available funds.  We make excuses and put off any action until later.  "There's too many things going on for me to start saving up.  I'll start saving up next month, in 6 months, next year, etc."  Then something comes up, and we drain our available funds again.

Sure we are fine for now, while we are still making money.  What's going to happen when we can no longer make money?  If we are unable to handle our own finances now, how can we possibly teach our children how to take care of themselves?

We all say that we want and need to save more.  Yet when you look at the numbers, it doesn't add up.  I'm sure we try hard at this.  We slowly make more money, we get raises, we get bonuses; there’s no doubt we try harder.  However, trying hard is not the whole answer.

The time for action is now.  It's easy to look at our financial situation, shrug, and then put it off until later...or never.  It's easy to think about "winning the lottery" or "marrying rich" or "inheriting your wealth."  Sure that may happen, but don't count on it.  Look back and see how much money you COULD have saved up by now if you saved just 10% of your income over the last few of your working years.

• Start saving 10% of your income today.  For every \$10 that you make, put \$1 away.  Of course, a higher savings rate would be better, but 10% is a good starting point.
• Put your money away in a high interest savings account with an online bank like ING direct.  Set up automatic savings withdrawal of 10% of your paycheck to go to this online bank.  This online bank will physically separate you from your money, so you won't be tempted to access it unless it's absolutely necessary.

Start today.  A few years from now, you will be able look back and see how much you’ve accomplished financially.