With money’s familiarity it’s easy to lose sight of its importance in your life today and more importantly, in your future. Because of this, I often instruct clients to put away debit and credit cards and use cash only to make money less intangible and more familiar. But, in your profession the opposite is true. Because salons are a cash-based business, it is always available and cash too becomes insubstantial and familiar. It becomes just as elusive as money spent with debit and credit cards.
Dollars become just “pieces of paper” and you can easily fall into an “easy come, easy go” pattern of money management. But the earning of those dollars isn’t easy and it’s a shame that this familiarity lulls you into unconscious behaviors where you don’t make the most of your money today, but more importantly, you don’t save your money for tomorrow.
So how do you change this unconscious pattern with money? Just follow this three-step plan:
1. Commit to using your hard-earned dollars for both today and tomorrow. Sounds easy, but how do you do that? Divide a sheet of paper down the middle. On the left side, list all the reasons why you don’t save now. On the right side, list the reasons why you want to save. Analyze the list and decide on which side you want to be — not where you think you should be, but rather where you want to be. A commitment needs to be your choice, not someone else’s. Once you choose, you will commit consciously to saving for the future instead of unconsciously spending for today.
2. Choose one day a week to contribute to your future. Take the entire day’s earnings (or a portion) and deposit it into a separate savings account. Make this a weekly ritual that takes priority over everything — no excuses. After a month, it will become a habit that replaces your old pattern of spending.
3. Allocate for the future. When you have $1,000 in your new account, you can allocate between short-term and long-term investments. Allocate a portion or percentage of the new account as a safety net for emergencies (six months to a year), a portion for larger, projected expenses (one to five years), and a portion for long-term investment (five years or more). It’s important to fund all three segments at the same time or you fall prey to never getting beyond the safety net portion. Once you have done the allocation, separate the money into three accounts, divide your weekly deposits in the same way and watch them grow.
These three easy steps are all it takes to set up a lifetime savings plan: you’ve made the commitment, formed a habit, and allocated wisely. Once your plan is underway, you’ll need to decide where to invest these dollars. There are many types of accounts. Here are a few points to consider.
> Convenience. Since you are trying to make this a habit, set up your initial accounts where it is easy to make deposits. Remember, it won’t take much of an obstacle to end a habit. Make it easy to stay committed.
> Fees. Because today’s savings accounts only pay about 1%, find accounts where monthly fees won’t eat up the earnings. Credit unions are often a great source for low fees.
> Risk tolerance. As your money grows, there are more investment options for generating higher investment returns (earnings). Higher returns generally mean higher risk of loss. Don’t be talked into investments that keep you awake at night worrying. Find an investment with whose risk you are comfortable.
> Investment horizon. This refers to the length of time you expect your money to be invested. If you will use the money within a year, use a savings-type account where there is no risk for untimely fluctuations in value. But, if you won’t be using the money for a long time, you can invest in something that has higher returns, more risk, and consequently more fluctuations. With a longer investment horizon, you can time the withdrawal of these dollars and not worry about having to do it on a “bad” day.
> Mutual funds. With over 10,000 funds to choose from, you have a wide variety of investments to match your risk tolerance and investment horizon. Using mutual funds gives you the option to not “put all your eggs in one basket.” So even with only a small amount to invest, you can invest in small pieces of many stocks and bonds allowing you to diversify and spread your risk.
> Retirement plans. For long-term investments, take advantage of tax laws that allow you to defer and/or eliminate tax consequences. By doing so, you’re using government dollars to contribute to your future. There are many types of retirement plans to choose from. Consult your tax professional to find the one that fits you best.
These are just some of the investment considerations ahead of you. Before you know it, your savings will grow into something to be proud of and you’ll be on your way to financial freedom. Begin planning for your future today. Whether you’re 20, 40, or 60 — today is the perfect day to begin a new conscious life with money.
Jane Honeck, CPA, PFS, specializes in tax and financial planning for professionals, small businesses, and individuals. She is the author of The Problem With Money? It’s Not About the Money! To learn more, visit www.janehoneck.com.
To learn more about saving for retirement, go to www.nailsmag.com/retire.