Commit to a Per Diem

Per Diem… it’s a phrase that means “an amount of money paid per day.” In the world of personal finance, it’s a phrase that is not used nearly enough. I want you to commit to a per diem.

That’s right. I want you to pay yourself some amount of money every single day.

I’ve written about per diems before, but this article is about creating a per diem that’s specifically designed to take care of Future You.

The Four Steps of the Per Diem Plan

1. Pick a daily amount to save.
2. Set short-term goals for your money.
3. Invest that money.
4. Don’t spend the money until you retire.

Step 1 – The Amount

If all you can afford is $1, that’s fine. When you have more, you can give yourself a raise. The important thing is to get into the habit. Start the habit today.

Think about it. How would you like to have more than $3500 by this time next year? All it takes is $10 per day. That’s not a whole lot of money in today’s world. If you have it to spare, then I’d like to see you put it to good use. And what better use is there for your money than ensuring that you’re comfortable, warm & fed in your dotage?

Maybe you’re fortunate enough to be able to put away $20 per day. Great! Do it! I’m not a stickler on the amount that you save each day. However, I am adamant that you save something. Start with whatever you can then increase your per diem as you’re able.

Step 2 – Set Short-Term Goals

Like I said above, this per diem is for Future You. When I talk about short-term goals in this context, I don’t mean saving for a vacation or new sports equipment, although you should never go into debt for those items either. You should definitely save first then pay cash at point of purchase.

No. In this case, your short-term goals are monetary targets. Let’s say you commit to a per diem of $10. Set a target amount of $500 or $1000. Then create an automatic transfer from your main day-to-day bank account to a separate savings account. When you hit $1000 in your savings account, then you invest that amount into an equity-based exchange traded fund or index fund.

You do not want to keep your money in a savings account. Why? I’ll tell you why – the rate of interest paid on savings accounts is less than inflation. You are losing money by keeping your money in savings accounts for long periods of time. Inflation is a fancy way of saying that the value of your money is decreasing over time. When $100 buys 5 bags of groceries in 2019, but only 4.5 bags of groceries in 2020, then you are seeing inflation at work. Inflation means your money purchases less today than it did yesterday.

Savings accounts are great to accumulate money that will be spent in the next few weeks or months. (They’re also a good spot for emergency funds, in my opinion. Others disagree with me.) Commit to a per diem going into your savings account. When it hits the target number, you invest the money then start working towards the target again.

Step 3 – Invest that Money

You’re free to pick whatever monetary target you want. I like $1,000. It’s a nice round number and it will take roughly 3 months, at $10/day, to achieve. If you can save $20/day, then you’ll be investing money every 8 weeks. Also, it feels good to tell yourself that you’ve just invested $1,000.

Again, you don’t want to let your per diem languish in a savings account. That money has to work as hard for you as you do for it. That means you simply must invest your per diem money in the an equity-based product.

I have no idea how young you are at the time you read this post. The bottom line is that the longer your money is invested in the stock market, the better your odds of watching it grow to a nice, big mountain of financial security. That mountain won’t be built until you commit to a per diem.

Step 4 – Mitts off until retirement

The money you save today is for Future You. Even though no one is promised tomorrow, it’s best to plan as though you’re going to be here for a long time. It’s very, very possible to find the balance between enjoying the present while saving for the future.

Wouldn’t it be awful to live to 92 yet you ran out of money at age 74? The social safety net isn’t designed to keep you comfortable. It’s designed to keep you at a level of not quite starving to death. That would be a terrible way to live during your retirement years.

Allow me to be clear. Your per diem money is not to be touched.

You’re still responsible for creating an emergency fund, and for replenishing it if you need to use it. Sadly, the rest of life’s expenses don’t disappear just because you’re saving for your future. You’ll be saving for tomorrow while paying for today. Commit to a per diem, then live the rest of your life on whatever’s left over.

And if you find that you have too much money waiting for you when you’ve finally retired, feel free to leave me a message. I’ll happily take whatever amount of money you don’t want.

****************

Weekly Tip: Never grocery shop when you’re hungry. You’ll likely make more impulse purchases and that can throw off your budget. Whenever possible, eat before you go to the grocery store. Make it easy for yourself to stick to your list!