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Some tips to be strict about your savings!

2021.6.21 Vítor Ribeiro, CFA

We know how difficult it is to save. There are many incentives to consume and disposable income is never enough for our normal life. But there are ways to change this feeling. Examples, motivations and rules that can help us set goals and establish the habit of saving.

We all know stories of simple and humble people who left fortunes and people who lived almost always beyond their means, leaving debts and responsibilities to family and friends. We are well aware of the examples of stingy or cheap as opposed to wasteful or free-handed. But there are stories that touch us more and make us think and make decisions.


Ronald Read's remarkable story

I first came across Ronald Read's story in this April 2015 Washington Post article, written by Barry Ritholtz. It is a remarkable life story with timeless lessons.

This American, who lived in the state of Vermont, worked at a gas station and lived modestly and simply all his life. He didn't study economics or work in the financial market. He also didn't have high incomes. But Read, who died in 2014 aged 92, left a fortune of around $8 million. In testament, a large part of this heritage was donated to a hospital and a library.

The truth is, his friends and family were surprised, even shocked, when they learned the value of his heritage.

With his frugal lifestyle, he avoided spending money, and invested all his savings in the financial market, in company shares, building over several decades a diversified portfolio with 95 positions.


What lessons can we draw from this incredible example?

This example of rigor and discipline reveals some important lessons.

Right away, patience and time. Time was always on Read's side. His plan ran for several decades, with systematic reinforcements and always reinvesting dividends. No rush, no easy profits, no unnecessary transactions, no capital gains to avoid taxes.

Read went through several crises and bankruptcies, but he never stopped investing.

He also made the best use of the power of the capitalization effect, which we cover in this article. While he reinforced his assets with savings, he also reinvested the dividends from his portfolio.

But a life of sacrifice, restrictions and extreme frugality also seems to lead us to other considerations, mainly in terms of personal satisfaction and the balance between savings and the pleasures of life.

Each one must make this balance, defining their own goals and motivations, but always knowing that we must start saving as soon as possible, that we must be patient and let time work in our favor.


Rules and tips to start saving

So, to start our savings plan, we can define some rules and take advantage of some tips pointed out by many experts in personal finance.

From the outset, we must define an emergency fund with an amount of 6 to 12 months of our annual expenses. This fund is for unplanned and emergency situations. It is our safety net and safety margin.

Then do an analysis of your monthly expenses for the past few months and your disposable income. Set a savings of at least 20% of your net income. You can start with a lower percentage, but target that value. This saving must be made when you receive your income and not after you consume it.

Take your savings and invest according to your goals and preferences and not based on emotions and tips. Invest efficiently and considering your unique plan.

Look for a suitable lifestyle according to your needs and possibilities. If the car lasts 10 years, so much the better! You should also avoid financing via credit cards and personal credit at all costs.

I think about your heritage in an integrated way. Gather your financial capital, but also your human capital, real estate and other assets. Then deduct your finance and lifestyle responsibilities. This way you will understand how your assets are and what the next steps to take.


The current environment for investing and saving

The current interest rate situation is worrying for the traditional saver who invests their savings in term deposits or other short-term, guaranteed capital instruments.

It is common to see nominal interest rates between 0% and 0.5% per annum for a simple term deposit. If we take into account inflation, which last May was around 2%, then we can expect a negative real interest rate of approximately 2%. This means that our inflation-adjusted savings are losing value.

Inflation is a silent tax. It doesn't seem to affect us directly, but in the long run, even in the case of a controlled inflation rate, its effect can be devastating.

For example, if you take all your money and leave it in your checking account or bury it in your backyard, the money would lose 50% of its value in 23 years with an inflation rate of 3%.


Negative real interest rates and incorrect asset allocation, thinking of short-term comfort rather than long-term interest, make our assets more fragile and less prepared for the future. Even more at a time when pension systems are going through a period of great uncertainty and with less and less stable and predictable future benefits.

Saving is a habit. If we introduce it into our routine, saving becomes systematic and a normal part of everyday life. A kind of diet for consumption, which produces long-term satisfaction and security.

Be patient and give it time. I let it work for you.

Vítor Ribeiro, CFA
Vítor Ribeiro, CFA

Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.

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