The old piggy bank idea is a good one most people understand it intuitively. We all know the clichĂ©s: a penny saved is a penny earned; pay yourself first; grow your wealth and so on. What if those old clichĂ©s are true? When Grandma gave you a piggy bank for a present, it’s possible she could see into the future.
Modern financial planners have different names for those piggy banks, but the basics are the same. And the earlier you get started, the more those little pennies are invested in compounding interest accounts, the more they will add up.
The piggy bank habit is one Laszlo Szojka, a financial advisor with D.W. Good Investment in St. Albert, keeps going back to. For him, saving money began as a child and he kept at it even after he got his first job in high school. Even in his university years, he kept a part-time job and he still managed to sock away some funds.
“I started saving 10 per cent of everything I earned. Saving is habit you learn and it’s a habit that I never stopped,” Szojka said.
But Szojka is quick to add that having a stash of funds is one thing. Using them to your advantage and even using credit to your advantage is another story.
“You can use credit to your advantage. You can even use credit cards to your advantage if you pay them off fully every month. You need to understand how borrowing money works and how interest works. The bank knows the game and they profit from it. Do you know the game?” he asked.
Szojka used another child’s toy – simple building blocks – as a metaphor for building a financial plan.
First up in the financial foundation is the ‘Do not touch’ block. Next comes a ‘home’ block, then an emergency block and finally a ‘retirement block’.
“When you are starting a ‘Do not touch’ block put everything you can into it. Be frugal. Do you really need that expensive coffee? Do you really need a cellphone? The money you save is for the future and eventually what you save and invest will pay you back,” Szojka said.
He advises investing the ‘Do not touch’ block of funds in a Tax Free Savings Account, because even those who vow ‘never to touch’ can run into real-life emergencies such as family illness or perhaps the requirement for a new furnace. “If you have an emergency that is severe enough, you can withdraw those funds from a TFSA and then later, go back to fill the account up again,” he said.
Mortgages could come under the using credit wisely and to your own advantage file, Szojka said.
“Right now most mortgages have very low interest rates. It may not be to your advantage to pay off that mortgage as quickly as possible but instead, leverage those funds invested. Think of it as rent. Your mortgage payments are your rent you pay yourself towards the equity in your home.”
The ‘retirement block’ is a huge part of a person’s financial foundation. Szojka cautions against using funds set aside for retirement instead of emergency funds.
Szojka used a formula to show how compounding interest can truly grow those invested piggy-bank funds. As a model he showed a 22-year-old’s potential savings, if he simply begins by investing five per cent of his salary per month.
“I would prefer he invest 10 per cent but maybe just starting out he can only manage five per cent. He keeps to that five per cent and by the time he is age 30, perhaps he will have saved half his annual income. By age 65 he will have saved more than $250,000.”
The money that accumulates will obviously vary with the amount put away by the wage earner and by the interest rate that is paid. The example is just that, Szojka stressed, but the ability to tuck away funds for the future is a strategy that will always pay dividends in the future.
“The money you set aside will create wealth. Money is just a means of exchange. But as you invest it, and the interest compounds, it will grow. That’s what the wealthy do.”