Time to grow up and get your finances in order

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I remember sitting in personal finance class in University and our professor putting the following words on the board, “YOU make money, or your MONEY makes money – you decide.”  This statement speaks instantly to the importance of saving and was an impactful moment in my early personal finance education. 

You can do both of course, in fact you should do both, but you can’t even start to have your MONEY make money, if YOU don’t first make money yourself and start saving.

YOU make money, or your MONEY makes money – you decide

In the beginning you earn income at your job where you trade your time for money.  As time goes on, if you save some money each pay, you can invest those savings so they can start to work for you.  This is how you can get into the position where you can have your MONEY make money too. 

This is a great lesson for any student, and in theory most people understand this.  Many of us plan to start saving once we grow up and get a real job.  We plan to start when we feel we are ready.  However, there is no moment when you arrive and suddenly feel ready.  There are always lots of things to spend money on and bills to pay so saving gets pushed aside. 

Budgeting, saving and money management are frequently procrastinated. And not by merely weeks and months; they are often procrastinated by years.  It is one of the most popular New Year’s resolutions, yet also one of the most frequently abandoned.

A recent TD survey indicates a whopping 60% of Gen-X Canadians (currently age 35-54) expect they will not retire on time. Most indicated they wished they started saving earlier.  Many are now realizing they put it off for too long. 

It’s human nature; we think we have lots of time ahead of us.  But time marches on.  We perceive our retirement years as being far away; until they are upon our doorstep. 

We wonder, How did I get to retirement age so quickly?  Why didn’t I start planning and saving sooner?  I was going to get serious about this one day when I grew up, How did time pass me by so quickly?  Well, for Gen-X and millennials who follow, the time to grow up and get your finances in order is now.

The importance of starting to save early cannot be underestimated.  If you are already late, now is still better than never.  As the old proverb says, “The best time to plant a tree was 25 years ago.  The next best time is now.”

The best time to plant a tree was 25 years ago.  The next best time is now.

Income you earn from your job is considered active income because you need to do the work to earn it.  Income earned from investments is considered passive income because it is earned by the money you have already saved.   People build wealth strategies to purposely create and increase their passive income each year to contribute to their savings.

There are a number of ways to earn passive income.  Investing can provide an investor with interest, dividends and or capital growth depending on where they invest.

Albert Einstein was attributed to saying “Compound interest is the eighth wonder of the world.  He who understands it, earns it… he who doesn’t … pays it.”

Video: Compound Interest – The world’s 8th Wonder

In a low interest environment traditionally safe interest investments alone (i.e. GIC’s) may no longer provide enough interest to meet your needs.  Adding a mix of income and dividend investing can offer a new approach to generate sustainable income.

Video: Keeping up with the Times – Sustainable Income

Educating people to understand these principals can go a long way to creating investors who understand the importance of proactively living out from under the shadow of debt, and saving early so they have as many years as possible to let their savings grow.

 

Photo credit: Pixabay

 

Column as it appeared in Elgin This Month February 2017 Issue (Page 27)

 

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Going on autopilot for a while isn’t a bad back up plan

 

Stephanie Farrow, B.A., CFP., Stephanie has over 20 years’ experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and a Certified Financial Planner designation.  Stephanie has been writing financial planning columns for local business magazine Elgin This Month since 2010.  Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.

Visit us on Facebook or follow Stephanie on twitter @farrowfinancial. or connect on LinkedIn

 

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