Saving and Investing Part I: The Mindset and Approach
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Photo by Ken Teegardin
One of my favorite stories in the Bible about stewardship is Noah and the ark. God’s provision is evident in His warning to Noah (Genesis 6:13, 17; 7:4), His instructions to build the ark (Genesis 6:14-16, 19-21), and in Him sending all living creatures to the ark (Genesis 7:8-9). Often overlooked is Noah’s obedience (Genesis 6:22; 7:5, 15; 8:18-19). In order to build the ark, Noah had to be a good steward of the time and resources given to him by God. Likewise, we should be good stewards of the resources God has given us and plan and act for the future as Noah did. Our paychecks are not designed for us to live paycheck-to-paycheck; we need to save and invest for our future goals or emergencies that may come our way in addition to blessing others along the way. The concepts below are designed to challenge your financial mindset and give you a different perspective on finances.
Getting Paid
In salary or pay negotiations, the company offers a job with a salary of $XX,XXX or a certain per hour pay. When we think of our jobs, we like to feel good about our pay, so we say our pay is whatever number our employer quoted to us. We often make decisions on how much of a monthly car note or how much of a monthly mortgage payment we can afford based on this inflated number divided by 12 months. If you add up all your cash from paychecks for a year and compare that amount to your salary or your hours worked for a year times your pay rate, you will find you make significantly less than these amounts we often quote to ourselves or others due to employee deductions for taxes, benefits, etc. I challenge you to change the way you think about this in your personal finances. As a starting point for your budget or personal financial decisions, start with cash deposited in your bank account minus tithe minus any retirement savings, if you do not participate in an employer sponsored retirement plan.
Which spender are you?
Once you know how much money you really make, you can see which type of spender you are. There are three types of people in the world, and everyone falls into one of the following categories:
- Spenders living above their means
- Spenders living at their means
- Spenders living below their means
The first two categories provide no means to save or invest and they have no margin for safety in the event of a financial or life emergency. Only those living below their means are able to save or invest money for emergencies, retirement, or any other long-term goals.
Need vs. Want
One of the most important questions you should ask before spending money is “is this necessary for me to survive?” If you are honest with yourself, you’ll find most spending is on wants. I encourage you to rank all of your spending categories from most important for survival to fun activities. Have a plan as to which fun activities you cut back on in case an emergency happens or you lose a source of income.
Risk vs. Reward
When investing, risk and reward are typically opposites. If you keep your savings or investments in all cash, you will not see a significant increase in value of your savings or investments. If you save and invest in riskier investments, you could get a very good return, you could get back the same amount with little or no growth, or you could lose what you invested.
Income Compounding
Investopedia defines compounding as
Compounding is the process of generating earnings on an asset’s reinvested earnings. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.2
In compounding, the reinvestment of earnings or interest back into investment yields greater investment income in the future. The balance of the investment snowballs larger and larger as time goes on. It is important to invest sooner rather than later and keep reinvesting income back into the investment (don’t draw money out of the investment).
Melvin graduated from LSU with a BA in Latin and a BS and MS in Accounting. After working for an accounting firm and earning the CPA designation, he now works as the controller (financial reporting and accounting function) for a privately-held company in Slidell. When not listening to red dirt music, attending Mardi Gras parades, tailgating, or watching football in Tiger Stadium, he serves on the Vintage Connect Team and is a third-generation Lakeview resident.
1“Investing 101: The Concept of Compounding,” Investopedia, accessed June 10, 2015, 2http://www.investopedia.com/university/beginner/beginner2.asp#ixzz3cblM5VHm.