I hear that a lot in my Rent to Own business. Clients call to see if they qualify for our program and then they ask how we calculate the rent that they will pay. That’s when I tell them that the rent is comprised of the cost portion (i.e. the true costs of the house) and the savings portion that we collect and credit to them. By the end of our program, we have helped our clients clean up their credit profile and we have collected their down payment – they are ready to go to obtain their own mortgage. It works because we are their accountability and forced savings program all in one.
“But I don’t need to pay the savings portion; I’m going to save that on my own.” There’s just one problem: it won’t happen.
Take a look at your own situation and ask yourself a single question: How much money have you saved or invested in the last five years? I’m using a five-year period because everyone can have a bad year, but your record over five years should give you a pretty good indication of your habits. If you have not saved much over the last five years, you are probably not going to save much over the next five years regardless how much money you make. Why? Two words: your habits.
I have been a real estate investor for more than ten years now and I have seen this pattern over and over again. People intend to change, they have real incentive to change and yet they don’t do it. If I relied on my clients to save their down payment during the term of our Rent to Own agreements, we would have a dismal success rate at the end rather than our close-to-100% closure rate.
What I have learned over the years is that it is not enough to want to do something; you actually have to put a plan in place and act on it. Intention without action is delusion. What’s the saying? Something about the road to hell being paved with good intentions.
In a previous blog post entitled The Myth of More Money, I talked about the two key factors that play a role in financial success: Accountability and your savings muscle. So how exactly do you develop a savings muscle? Start doing it and stick with it. This month, set aside something, anything – $20 or the equivalent of a meal out or the money you were going to spend on a new outfit. Really, the amount is irrelevant, it’s the doing that matters.
Now here’s where things get interesting. You save something the first month and you feel good. You save something the next month and you start feeling pretty pleased with yourself. By the third month you might even feel like a rock star but then dammit, the car breaks down and you need extra cash so you put off saving until the following month. But then hold on, next month you have to pay for all of Janet and Jim’s summer camps. That’s a lot of money to shell out so you defer saving yet again, and before you know it the pattern of not saving re-establishes itself courtesy of life getting in the way.
For the past couple of years I have been reading Ramit Sethi’s blog. He’s the guy who wrote I Will Teach You To Be Rich and who has gone on to develop a variety of programs to help people earn extra money on the side, find their dream job and negotiate for more money. The reason I keep reading his stuff is not because of the financial advice – it’s interesting but as Sethi says, what he teaches can be found for free elsewhere on the net.
Nope, the reason I find his stuff so compelling is because the guy is obsessed with human psychology, the “why” behind our actions. Why do we say we want to lose weight and then revert back to the same patterns that keep us unhealthy? Why do we say we want more money and yet we keep whining without doing anything about it? His point is bang on:
You can have the best information at your disposal however it will make no difference to you until you figure out the psychology behind your actions (or inaction) and change your habits.
Your habits say a lot about who you are. You don’t like the results in your life? Change your habits. Are you having trouble changing the habits? Figure out the psychology behind them and nail them once and for all.
Back to saving: It is hard to maintain the willpower to save money month in, month out so why fight it? Subvert your tendency to spend the cash by automating your savings. Take the money out of play right at the source. When your pay cheque comes in, set up an automatic transfer to a savings or investing account before you even see the cash land in your chequing account. Then, determine how much money you have to play with after paying all essential costs and find an app to monitor your discretionary spending. Once the spending money is gone, you’re done.
In order for this system to work, you must have a buffer in place for those moments when your car goes on strike or the dentist informs you that your wisdom teeth need to be extracted. Surprises can and do happen so plan for them. Your cash buffer should be the first thing you build up with your automated savings, with enough in there to cover you through several months of low-to-no cash flow. Once the buffer is in place, you can build up your savings and investments for your other priorities: retirement, buying a house, travel and so on.
So really what I’m trying to say is this: Less talk, more automated action is the order of the day when it comes to saving. Once you develop the habit of saving it will be very hard to go back to living by the seat of your financial pants.
And if you tell me that you can do it despite the fact that you haven’t done it yet, I have just one comment: Yes you can. Now go prove it to yourself.
Until next time, Survive, Thrive and Grow.