Friday, July 10, 2009

Take One Step At A Time


Saving Money Tip #161 - Take One Step At A Time. Recently I saw a question posed online about how a young person can buy a house in the expensive DC area if he/she is not the product of a wealthy family or a doctor/lawyer/highly paid professional. I know it sounds cliché, but my answer to that person is to do it “one step at a time.” Put a few hundred dollars into an account each month and over time your money will grow until you have enough to put down on a house. Really, it’s that simple. It’s easy to squander a couple hundred dollars per month. And if you don’t think you are, then reevaluate your expenses. This particular person who asked the question lives on his own, paying a fair amount in rent. For young people (in their 20s), it’s pretty widely practiced in this area to live in a group home or have a roommate or two. If you are serious about buying a house some day in the not-too-distant future, then live with roommates for a few years. It’s an easy way to pocket several hundred dollars per month so you can buy they house that you dream of. A recent graduate from college who starts putting away $300 per year should have about $50,000 to put toward a house in 10 years if he earns 5% interest per year. No, it’s not a get-rich quick scheme. Nor is it exciting, sexy, or fun to get your money that way. But the important thing is that it works.

“Taking one step at a time” works in most areas of finance. If you are in debt and want to get out, it’s wishful thinking to do it overnight unless you suddenly come into money, which is unrealistic. Instead, putting a little bit towards it on a regular basis will cut down or eliminate your debt. Again, it’s not exciting to do it that way, but it’s achievable – and more realistic than waiting to win the lottery or for Great-Aunt Sophie to pass on and receive an inheritance from her.

Want to learn about finances and investments? Don’t do it all at once. The meaning of bonds, interest rates, IRAs, 529s, and mutual funds will get all mixed up if you try to learn it all at once. No one becomes a financial expert overnight. Pick a topic that you are interested in such as saving for retirement, and read up on it. Learn the terms and talk to people about it (or read this blog!). Once you are comfortable, move on to the next topic. As you put into practice what you learn, step-by-step, you will become knowledgeable about finance.

Very few people get rich quickly. Even those that make huge salaries often spend all they make. But those who are successful financially are mostly the ones who took things one step at a time. They saved one dollar at a time, chipped away at their debt little by little, learned about investing slowly, until they woke up one day 20 years later to realize they had gotten rid of their debt, accumulated hundreds of thousands of dollars, and knew a bit about what they were doing. If you want to build up your savings, pay off debt, or just learn about finance, then it will take time. Reading books, talking to people, and saving a little bit at a time will get you where you want to be financially. In other words, slow and steady wins the race, folks.

In Real Life (IRL) – I started thinking about this post when I saw this question posed on a forum I frequent. While I was 32 when I bought my first house, I had saved quite a bit of money by the time I was 30 and was ready to buy one earlier. As I’ve mentioned in the past, I had a good start in life, but I did not inherit thousands of dollars or have a super, high-paying job. In fact, my first job out of college, I was making under $20,000 exactly 20 years ago. But until I was about 30 years old, I saved on rent by living with friends. This allowed me to put away a few hundred dollars per month that I wouldn’t have had if I lived on my own. Yes, after a while it got old, and I was ready to branch out on my own. But by sacrificing privacy for a few years, I was able to build up a large deposit to put toward a house for the long-term.

Even as a finance major in college, I didn’t learn a lot about personal finance in school. I knew what a bond was and how interest rates are calculated, but I was never taught by any teacher about how to build up savings for myself or how to invest my own money. But I learned from family and friends in baby steps. After being comfortable with money in savings accounts and CDs, I took the baby step of investing in a mutual fund – where I could potentially lose the principal (the money I put in). Did I put all of my money in there? No. Did I just pick one out of the thousands out there? No. I talked to friends and family. I read up on a few different ones, and then I slowly made my way into real investments with a small dollar amount. As I became comfortable month after month putting a small dollar amount in there, I gradually started putting more into the fund and expanding into other funds. I did it slowly and methodically until the point where I am very comfortable with this type of investing.

Similarly when I was ready to invest in individual stocks, I joined an investment club, where people pool small sums of money together to create a bigger pot and buy more stocks in order to diversify or not have all of our eggs in one basket, or stock. By entering the stock world with others who were more knowledgeable than I, I was able to ease into this world with my hand held. Once I became comfortable, I started buying stocks on my own. It was a slow process that took me about 3 years before I got to that point. And yes, I made some mistakes but not as many as I would have made if I started buying stocks hastily. Again, slow and steady wins the race. Time goes by fast and before you know it, your money has built up and you have learned a few things about finance and investing over the years just by taking it one step at a time. For posts about frugal living so you can help reach your financial goals, check out Frugal Friday.

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