One of the most powerful tools you can use to build wealth is creating an environment of "forced scarcity". This concept is rooted in the goal of saving for the future first and keeping your monthly household cash flow lean.
This strategy can be an alternative to setting up tedious monthly budgets and can slow down any big spenders in your household. If implemented and funded correctly, it frees you to spend as you see fit, since all your savings goals have been taken care of up front. Here's how to set up, prioritize and fund a personal forced scarcity plan.
Where to Start
Write down your goals. Take time to record your short and long-term goals. The goals might include saving for retirement, education, being debt-free, creating a safety net of cash reserves, travel or even seed money to start a business. This is the stage of the planning process where you can list your stretch goals. If you want to take the entire family to Disney World or retire to a house in the mountains or on a lake, this is the time to lay it out. Dream a little bit about what you would like to be able to do.
Prioritize goals by need. Line up the funding objectives by importance and need. Before funding your long-term goals, such as retirement or college savings, remember to set up a basic emergency fund. Make sure you have a foundation of three to six months of cash reserves.
Save for retirement. Achieving financial independence will be easier if you start saving as soon as possible. Saving a little now can allow you to reap large benefits over time. A young saver has an opportunity to turbo charge his savings because his assets will grow exponentially over several decades. However, if you put off saving until your 50s or 60s it's much more difficult to accumulate a large retirement account balance because your savings has little time to grow.
Debt repayment. It can be helpful to create the goal of having all debt (including mortgage debt) paid off by retirement. Consumer and credit card debt should be paid off as aggressively as possible, especially if you are subject to high interest rates.
Education funding. Your children and grandchildren can get student loans, but there are no loans, grants or scholarships for retirement. Ensure that your retirement finances are on stable ground before loading up 529 college savings accounts or educational savings accounts.
How to Implement
Select an appropriate percentage to save. Your long-term goal might be to save 15 to 25 percent of your gross income for financial independence. This percentage can include your contributions to savings, investing and retirement accounts. But you can start smaller and increase the amount you save over time. For some people it takes time to build the discipline and lifestyle that supports this savings behavior.
Get a 401(k) match. Make sure you are claiming your employer's matching contributions for your retirement accounts. This can be a good foundation goal for your retirement savings. Plus, if you are not taking advantage of this benefit, you are leaving free money on the table. Many employers provide matching contributions on the first 3 to 6 percent of compensation.
Save more as you get raises. Use pay raises and bonuses as opportunities to expand your savings behavior. If you get a 5 percent pay raise, see if you can increase your annual savings by 2 to 3 percent.
Appreciate your assets. Learning to appreciate the value of having assets versus the temporary high of buying stuff takes time. After all, there are entire industries set up to help persuade you to part with your hard-earned money. However, with practice and a little bit of success watching your assets grow, you will be hooked. Having money in the bank can help you accomplish goals, give you peace of mind that you will be able to cope with emergencies and allow you to leave behind a legacy that you created. Long-term goals can be fulfilling when accomplished, and saving gives you resources to turn those dreams into reality.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".
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