One of the smartest things I’ve ever done with my money was to learn how to separate today-money from tomorrow-money. Today-money is the stuff that gets you from one day to the next – it’s the money for groceries, for your shelter, for your transportation, for your charitable donations. Tomorrow-money is the money that you will need to buy those very same things when you’re no longer earning a paycheque.
If you’re going to retire at some point in time, you’ll need to save some of your today-money so that it becomes tomorrow-money. I know that sounds simplistic but it’s one of the most fundamental tenets of personal finance – if you spend all of your money today, then you won’t have any money tomorrow.
So, let’s avoid that eventuality – no one should ever strive to be old and poor. It’s not charming. The first step to avoiding impecuniosity is to figure out the answer to the following question: How do we accumulate tomorrow’s money?
It starts with an income and a bank account. You need to have money coming in and you need a place to keep it. If you’re getting paid, you need a bank account to receive money from your employer. I’m going to assume that you have a chequing account and that from your chequing account, you pay your rent/mortgage, your utilities, your vehicle payment, your student loan payment, your credit card payment, and any other payment that you’ve agreed to pay. Chequing accounts are great for day-to-day living expenses. They are perfect for today-money, which is the money that you need to spend today in order to live the life you want.
You know what chequing accounts are not good for?
They’re not good for tomorrow-money. It’s a very rare person who can keep a nice float of money in their chequing account without finding some way to spend it on a day-to-day purchase. Maybe family’s visiting on the weekend, or a road trip with friends is in the works. Whatever the temptation, tomorrow-money doesn’t have a shot in hell of surviving and thriving in your chequing account.
Enter the savings account. You’ve heard of living below your means. That phrase means that if you’re earning $1000 each week, then you’re only living on $900 each week. Your means is the $1000, and you’re living below your means by only spending $900. The difference between your earnings and your spending is your savings, which in this case would be $100. So where to put the $100 of savings that is going to eventually burn a hole in your pocket? Where do you put the money that isn’t spent?
The $100 is sent to your savings account. It goes into your savings account and is not spent on the day-to-day expenses of running your life. The $100 is your seed money to fund your retirement. The $100 is tomorrow-money and your sole goal for this money is to make it grow.
So how do you make it grow? That’s simple too! Every time you get paid, you transfer money from your chequing account, where the today-money lives, into your savings account, where the tomorrow-money lives. And then you do not withdraw the money from your savings account. You must commit to not using this money. It is savings, which means it is sancrosanct – it is not to be touched!
I can already hear your next objection – what if I have an emergency and I need to use the money in my savings account?
Again, the answer is simple. You’ll have a second savings account that’s for emergencies. You will continue to live below your means while you build up your savings account to a pre-determined amount of money. Let’s say you will feel best if you have $7500 set aside in your emergency fund. Over time, you will live below your means and you will make transfers from your chequing account to your emergency fund until you have $7500 set aside.
See? It’s a simple process. You get money from your employer deposited into your chequing account. Then you transfer money from your chequing account into your two savings accounts, some money goes into your tomorrow-money savings account and some money goes into your emergency fund savings account. And you don’t ever spend money from your savings accounts. Instead, you live on the money in your chequing account.
The trick to funding your savings accounts is to set up automatic transfers. Trust me when I tell you that 99.9% of the population does not have the discipline to manually transfer money to their savings accounts every time they are paid. You might be one the very few who possesses this divine power, but what if you’re not? Why take the risk? Why not simply set up an automatic transfer and get on with your life?
Automatic transfers always work. Putting automatic transfers in place results in one less chore for you to have to remember to do every two weeks. They ensure that you’re meeting your twin goals of one, creating a pool of tomorrow-money to live on when your paycheque-money stops coming in, and two, setting aside money for those instances when an emergency rears its head.