Millionaire Rule #4

Set Up Automatic Savings
No matter how great your will power, spending money is the easiest thing I know. Saving it is hard. Plain and simple, if a person has money they will spend it. If you make it hard to access your money you will spend less and save more. The solution is to effectively 'hide' money from yourself.

The biggest reason people fail to save money is that they only save what is left at the end of the month. This approach indirectly declares that saving money is your absolute lowest priority. All your savings account gets each month is the crumbs that are left over. Instead you must treat your savings as a top priority so the money is shepherded to safety first before any spending can take place. You must treat saving as an expense, the same as any other bill you receive. In this manner you can ensure that every month you meet your savings goals.

There are four ways to save automatically that I use and highly recommend:

First, if your employer uses automatic deposit to pay you directly into a bank account, use it to make saving automatic. To do this, you can request that a payment is sent to both your savings and checking accounts instead of a single one into your checking. Money arrives on each payday automatically in your savings account without you having to lift a finger.

Second, use your bank's online bill payment feature or the brokerage's automatic debit system to automatically send a check to your brokerage or investment company. This way you can fund your IRA a little bit each payday without any action needed.

Third, start a change (or even better $5 bill) jar or piggy bank. At the end of each day empty your pockets into the jar. If you take the $5 bill route then each evening if you have any bills with Abe Lincoln's face on the front, tuck them into the jar too. You will be amazed how much cash you have at the end of a year or two. Use this money to make a special purchase or for a vacation that you wouldn't otherwise be able to afford.

Finally and most importantly, enroll in your employer's 401(k) plan. There are great tax advantages and many employers offer a matching program for money that is hidden away in a 401(k). Saving is automatic, and the money is also protected (from frivolous spending) by strong incentives that encourage you keep your hands off the cash until retirement.

The final automatic savings method I would like to address is purchasing your home. Many people have built a great deal of wealth through home ownership. Owning a home has features similar to other savings methods. That's right, it is a savings method NOT an investment. It entails mandatory payments (principle paid on a mortgage) and builds up equity that is difficult to spend. This money is hidden from the saver because, in the past at least, selling the house and then relocating to a less costly place to live was necessary to get access to the cash. In other words, owning a home does not inherently make one more wealthy, instead it creates a 'forced savings' where principle payments build up over time.

In recent years this mechanism, that worked so well for our grandparents, has broken down with the ease with which you can obtain a Home Equity Line of Credit (HELCO) or second mortgage. An even worse tactic is to hold a negative amortization (also known as an option , differed interest, or graduated payment mortgage) in which you literally loose wealth every month holding this loan as you pay less than the interest owed. In order to reap the benefits of home ownership a person must recognize that the only true wealth created is the forced savings of paying principle and building equity. Buy a house, utilize forced savings, and create wealth.

If a person takes advantage of these Automatic Savings techniques it is nearly assured that they will become an millionaire even if they have a moderate income. Check out the rest of the Millionaire Rules from my post Ten Simple Rules to Build Wealth.