A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts, Brandon and Amanda Neely. This is the only podcast for strategies to grow your wealth simply and sustainably like grandma used to. Without further ado here are your hosts.
Brandon: Hey, I'm Brandon and welcome to Grandma's Wealth Wisdom where we work with you to build wealth grandma would be proud of!
Amanda: And hey, I'm Amanda. The title of today's episode is How To Save Money. Now that might make you think that this episode features grandma clipping coupons or using one of those applications on her Chrome extension like Honey or WikiBuy to score deals online. Well, that is not what this episode is about. When we talk about saving money on the Grandma's Wealth Wisdom podcast, what we're actually talking about is feeding the piggybank, but on a much, much, much larger scale that bypasses the piggy and the bank. [0:01:11.1] It's common confusion that we want to clear up and bring some helpful perspective towards on how to save money grandma's way.
Brandon: So, first of all, why even save, Amanda? Like the personal savings rate is pretty bad, so, yeah, why?
Amanda: Well, let's dig into that personal savings rate, and that will help set up the story for why we should save or why saving is a good idea. The Federal Reserve Economic Research, they have a bunch of statistics about things including the personal savings rate, and they have data all the way back to 1960, and the highest that they record the personal savings rate is 17.3%, and that was in May 1975, just after we'd come out of a major recession where there was high unemployment and high inflation at the very same time back in 1974/1975, and then similarly, when you look at this graph that they have, the personal savings rate also saw an increase just after the 2008/2009 recession, and it peaked at 12% in December 2012. [0:02:25.0] Now those are the highs. If you look at the lows, the lowest since 1960 was in July 2005, and it was a meager 2.2%. Now the latest data as of this recording when we were looking at their website, the Federal Reserve Economic Research website, they had January 2019 numbers, and they had the national savings rate or the personal savings rate at 7.5%.
Brandon: So there's no secret that Americans save less than we did in the past. There are various explanations for the causes. One popular reason is that we're paid less than we should be given the cost of living and inflation of basic life needs and healthcare, for example. [0:03:10.3] Another popular reason is that we live in a culture that values a huge value of consumption, and we're told all the time that we need to spend to keep the economy growing.
Amanda: Right. So Brandon and I, we don't pretend to know the reasons the personal savings rate is so low and why it's been declined in a lot of ways, but what we do see every day is the way people have to live their lives because either they weren't able to or they did not prioritize savings. We see that impact of that savings rate on people's lives every day.
Brandon: It's especially striking when compared with the 10% of monthly income going to non-mortgage debts like car loans, credit cards, student loans, and personal loans. [0:04:04.0]
Amanda: Yeah, so, again, from the Federal Reserve Economic Research, they have that Americans, on average, are required to pay 10% of their income on personal debt while they're only saving 7.5%. And, again, that's on average. I found some other statistics that talk about how 40% of Americans are actually spending up to half of their monthly income on debt. Can you imagine that? You get your paycheck and immediately half of it goes away to car loans, credit cards, student loans, personal loans, all of that kind of thing.
Brandon: 40%? That's high.
Amanda: Yeah, that's a lot. 40% of Americans. They just see half of their income going away towards debt, and on the flip side, as you look at the savings rate, there is a 21% of Americans that aren't saving anything, like they're savings rate is 0 – 21%, one out of 5. [0:05:00.9] That's pretty significant, and the reason I bring that up is because while we're talking about the 10% average going towards debt and the 7.5% on average going into savings, those are averages. They don't actually mean that much. There are people that are paying way more toward their debt. There are people that are saving zero, just like we've talked about in previous episodes, how average rates of return don't actually matter that much. The same thing when you look at statistics. Averages are hard to really know what's going on. Let's give ourselves a question – like why save? Brandon, set us up for this.
Brandon: So in reality, we finance everything that we buy. Either we take out loans because we didn't save for that thing like college or the car or whatever or we pay cash and lose the interest we could have earned had we not spent that money in the first place. [0:06:00.3]
Amanda: Yeah, so let's break that down into some numbers. Let's just take a $20,000 car. If you went out and purchased that car and took out a car loan, and you paid a 7.5% interest rate, the interest on that car loan is going to be about a little over $2000 just in the interest payments as you pay back that car loan. So the true cost of the car isn't the $20,000, it's actually over $22,000. It's 10% more because of taking out that loan. You're going to have to make that monthly payment every month, pay that extra interest. Now, on the flip side, you might say, well let me save up for that car, and then I'm going to pay the $20,000 and pay cash for that $20,000. There is still a higher cost to buying that car in terms of what the cash could have grown to over time. So let's say you're 35 when you buy that car, let's say instead of buying it, you kept that $20,000 just in a basic money market account that had a 2% interest, which is generous right now. [0:07:05.2] A lot of people are seeing less than that, so let's just say you did that from when you're 35 to when you're 65. That $20,000 could have grown to $36,424. That means the true cost of that $20,000 car is actually the $36,000 that that $20,000 could have grown to had you not purchased the car. That's what we mean when we say that we finance everything we buy.
Brandon: Hmm, yeah, and what if there was a third way that didn't involve paying interest to a financing company and didn't break the compound growth of your savings?
Amanda: There is a third way, and we're going to definitely share that, but first I want to make a very important point.
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Brandon: And what is that point, Amanda?
Amanda: The point is that there is a difference between needs and the wants. I first heard this idea from a guy named Loren Michaels Harris, and if you're like me, you might cringe when someone tells you to ask yourself, do you need it or do you just want it? It might actually sound like this in your head…
Brandon: It feels like grandma!
Amanda: [Grandma voice] Do you need it or do you just want it? [regular voice] It's kind of like the tonality that that takes in my head at least, and you might even think, yeah, grandma would ask those kind of questions, encourage you to be thrifty, don't buy what you don't need and so forth, but…
Brandon: Or Amanda says that to me all the time, right?
Amanda: Uh, not like that though. [0:09:01.4]
Brandon: Not like that, but you know.
Amanda: Okay, but anyway…
Brandon: [laughter]
Amanda: Here's what Grandma would really say about needs and wants. To use an example of like when a baby cries. Does the parent say go find out what the baby wants? Brandon, go find out what he wants. No, they know the baby needs something. They need some food. Their diaper needs changed. They want to take a nap. Babies don't cry because they want something. They cry because they need something.
Brandon: This is something we get to deal with quite regularly right now with our 11-1/2 month old, which he will no longer be a baby pretty soon, by the time this airs.
Amanda: Yeah, and what we're finding as he's transitioning to a toddler, he's starting to cry because he wants something, not because he needs something, and he's using the crying to get what he wants, but, typically, babies cry because they need something. What about adults? I mean, just like toddlers [laughter], we sometimes cry because we want what we want, and maybe we can't always get what we want, and that's where this power of needs and wants comes in. [0:10:05.0] Thinking in your head right now of something you want. Let me give you some examples: Maybe it's to lose 10 pounds, to purchase a home, to pay off your student loans, to get a better job, something that you want. You don't need things like this, but they are wants, and we all have wants. You've got something in your head you want?
Brandon: Yeah, I mean, I want to lose weight. I don't need to lose weight, but I want to. They might be good wants, but they are still wants. I don't need to lose that weight, but I want to. It will make me look better.
Amanda: Yeah.
Brandon: It will help me feel better. I don't know, all kinds of stuff.
Amanda: Yes, okay, once you have that want in your head, here comes the power question to ask: What do I need to do to get what I want?
Brandon: People should be writing this on a journal or something.
Amanda: Yeah. [laughter] Answers might be something like I need to make a grocery list and only get what's on my list if I want to lose 10 pounds.
Brandon: Amanda helps me with this a lot because she is in charge of the grocery list, and I want other things that sometimes are over the 10 pounds thing that I want. [0:11:12.6] It's like I want ice cream, you know, that kind of thing…
Amanda: Yeah.
Brandon: But she reminds me what I really want, and that I don't need it. That's where I hear her voice sometimes.
Amanda: Sometimes. But really, now I just do the grocery shopping so that we don't have that conversation.
Let's go to our next example: Maybe it sounds like this. I need to save up a $30,000 down payment by saving 10% of my income if I want to purchase a home, or if I want to pay off my student loan, I need to talk with Brandon or Amanda to find out how they did it, or if I want to get a better job, I need to update my resume and start looking for companies I'd like to work for, or let's just use some stereotypical examples of what people are like, do you really want it or do you need it or whatever. Let's say you want the latest iPhone or you want to get a latte each morning, and that's something that's a priority for you. [0:12:04.7] I say, if that's a priority for you, then good for you. But let's say this is what you need to do to get what you want.
Brandon: Um hmm.
Amanda: You might say, oh, but I want the latest iPhone or a latte each morning, I need to increase my income from my side hustle. Maybe that's your reward as your income increases. That might be a great way to look at it. So here's that question again: What do I need to do to get what I want?
Brandon: So, wants are not bad things most of the time. Behind those wants are needs. To get what you want, look for what you need. To really bring this home, you want to save money you can't afford to lose. There's a big difference between saving and investing.
Amanda: But, let's triple-underline that. There's a big difference between saving and investing. Listen really close to what
Brandon is going to say here.
Brandon: Keep you money is a secure place where it can grow. [0:13:00.6] If you're investing, you're putting your money at risks. That's what an investment is. We titled this episode How To Save Money. We're not talking about how to invest money. That's a totally different topic. According to grandma, you want to save money first. Set up a strong foundation, and then look at investing once you're saving strategy is in a solid place.
Amanda: Yeah, so now we can get into the heart of the issue of how to save money. When you know that we finance everything we buy, even in terms of paying for out past purchases in the form of debt or by using cash and giving up opportunity costs, and then you realize, okay, I want to be saving, and I know my future self is going to have needs and wants to, then you need to set up your saving strategy and implement it. [0:14:01.0] Now what we're about to share with you is going to sound too good to be true. Just put that out there. When you first hear it, it does sound too good to be true, but we can tell you from personal experience, that we've seen that this is true over five years that we've been using this strategy, and it really does work. So here's how it works: You save. You put your money into a safe place where it's going to grow with some guarantees behind it that are backed up by some really great long-term companies, and then when you need to buy that thing, you decided it's a priority, you're going to pay off some student loans, you're going to buy that car, whatever it is. Instead of using your cash, you actually use your cash as collateral to get a loan from a different source. Actually, like a different fund, basically, and then your cash still continues to grow. Let's say it grows at a 5% rate, so it's about average. 5% APR, your money is growing, or APY. [0:15:06.8] Sorry, and then your loan, let's say it's at a 2% APR, where you are paying a little bit of interest, but it's only 2% while your cash is still growing at 5%. So you're netting still 3% growth on your money. That sounds pretty cool that you can buy that thing that you want or need, doesn't matter [laughter], and still not lose the growth that you could get on your money in the process. Sure, you want to still buy responsibly. You don't want to spend outrageously just because you can. You want to only buy things that you would buy anyway, but it's a great way to save money and still buy the things that you need to buy or get out of the debt that you want to get out of or whatever it is.
That's what the third approach is where you're not breaking the power of compound interest even though you are paying cash for things that you want to get. [0:16:03.3]
Brandon: Now saving is important. I'm saying this to the young people who are listening to this podcast, the young people. Savings…
Amanda: And the old people!
Brandon: And the old people, but younger people, savings is important. As I talk to older clients, they wish they would have saved earlier and longer because they're in a place where that was their future self, but now it's now their current self, has these needs and wants, and they're not able to accomplish the things that they need because of what they did in the past. So you're future self has wants and needs too. Take care of your future self. To save in a way that won't also break compound interest. If you want to learn more, contact us at www.GrandmasWealthWisdom.com and click Request a Meeting. [0:17:01.5]
Amanda: I’d like to add here. There are only 200 individuals, men and women, who can help you with this third way that we're talking about where you don't break the compound interest, you're still about to purchase things. Two hundred people in the U.S. and Canada, and Brandon and I happen to be two of them. We're two of the 200.
Brandon: We're specifically called Bank On Yourself authorized advisors, which is really cool.
Amanda: Yes, so make sure you're working with someone who has the training and the accountability to set this up and knows how to do it in the right way that's going to benefit you over the long term. Again, that website to go to is www.GrandmasWealthWisdom.com. Click Request a Meeting, and you can set up an intro call, 15 minutes, just see if we'd be a good fit to work together, get all your questions answered, all that kind of stuff.
Brandon: So, again, savings is not even an important strategy. It is needed for our wants and our needs. [0:18:00.8]
So next week or next episode, we're going to be talking on an important subject. What if you could buy your wealth instead of building your wealth. Let's say you're already wealthy. What if you could double your wealth instantly. Would you want to know how? Join us for the next episode to hear how you can buy your wealth. Until next time, keep building your wealth simply and sustainably for your own future and the future of our grandchildren's generation.
The topics presented in this podcast are the general information only and not for the purposes of providing legal, accounting, or investment advice. On such matters please consult a professional who knows your specific situation.
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