The Basics of Saving with a Twist

MichaelAutomation, Education, Habits, How to, Saving Money26 Comments

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Basics of Saving

Although I’ve referenced it quite often, I don’t believe I’ve ever written a specific post about the basics of saving.

Saving is a fundamental skill that is quite often neglected.  It’s not particularly sexy, but it will make the fundamental difference of building wealth, or not.  A lot of people will earn a million dollars during their lifetime, but not everyone will be able to keep it.

What’s the secret to saving a significant chunk of your income?  Well, it’s simple to explain, but hard to implement… unless you know the twist!

Playing it Nice and Slow

It’s certainly true that I pulled in a chunk of change during the sale of my company, but that alone didn’t make me a millionaire.  In fact, if I had only received $1 from the sale, we would still have accumulated a million dollar net worth.

This result is no accident.

I always knew that saving money was going to be a super important strategy for financial freedom.  I learned this from my Dad, and from reading books like Rich Dad Poor Dad, Think and Grow Rich, and Multiple Streams of Income.

It’s a bit misleading to look at our current saving structure because I’m not making a traditional income anymore.  So, why is it that we are able to get away with not saving a lot this year, but still managed to increase our net worth by $180k?

Pay Yourself First

The first secret was our ability to save when it mattered most… when we didn’t have any assets!

Pay Yourself First is the discipline to set aside a portion of any income you make for yourself – first.

When I say first, I mean first!  That meant before I paid any bills, bought any doodads, or sent money anywhere else.

I used to wonder if this was selfish.  The quick answer… No.  You have to take care of yourself first so that you can then take care of others.

This habit is extremely powerful.

Compound Interest

By setting aside money and saving regularly, you begin to flex the muscle of habit.

The tiniest actions performed many times over will eventually add up to a significant outcome.

With compound interest, we can grow our money that we save through interest.  Consider that you can park your money somewhere and earn anywhere from a fraction of a percent, to double digits, you’ll slowly begin to see the power of growing your money over time.

I won’t lie, it is a bit like watching paint dry in the beginning.  But, stick around long enough and you will begin to see it explode in your favor.

Watch this video to get a better understanding of how this magic works!

Let’s Rewind

When I was just a young boy, my parents got me a wallet and a piggy bank to help me manage my money.  I distinctly remember my Dad telling me to save it for a “rainy day” which would later be translated to an “emergency fund”.

They also set us up with savings accounts that paid nominal interest.  I didn’t quite understand compound interest back then, but I thought it was cool to have a bank account regardless.

Because the interest was so small in the beginning, I’d simply save up a chunk of cash and then liquidate it ALL to purchase a large “toy” like a guitar, video game system, etc.

I didn’t go into debt, but I never had anything left to show for it at the end of the day.  My money management skills certainly weren’t great back then, but at least I was making mistakes and learning.

The Saving Shift

I always had the huge desire to become a millionaire.  I just wasn’t sure how to get there.

Once I got my first salaried job, something inside of me clicked.  Perhaps it was all the books that I was reading, my Dad’s subtle lessons finally sinking in, or just not wanting to blow through my hard-earned cash, but I started to SAVE.

They were rather small amounts in the beginning, but I took the basics of saving to heart and dove head first.

Mentally I made a note that I would NEVER touch this money I was saving unless it was a dire medical emergency.  I’ve kept this mentality to this day.

You really have to commit and decide upfront, or else it will become too easy to access these funds and blow them on something unimportant.

My Saving Strategy

basics of saving

This reflects my personal finances upon starting my first salaried position in I.T. making $42k.

What I was beginning to learn from my book mentors was that paying myself first was a sure thing.  I was decent at math, so the compound interest argument really stuck in my head.

I began to set aside $20 per week and sent if off to ING Direct (now known as CapitalOne 360).  To better understand my cash flow at the time, see the chart below.

Since I was positive $570/month, I was able to easily allocate a set amount of $20 per week, or $80/month.  This left me with $490 to work with.

Next, I decided to invest in some stocks.

I was reading about dollar cost averaging at the time and it made a lot of sense.  So, I opened up a Sharebuilder account which allowed me to invest tiny amounts of money into individual stocks.  I believe I started investing $20/week here as well, for another $80/month saved.

So, I was explicitly saving and paying myself first $160 per month.

The remainder, $410/month of the positive cash flow, went into my checking account where it accumulated as my emergency fund.  As you may have worked out, this emergency fund grew decently.  So, once I had a few months saved up, I then saved the excess into a discretionary fund which would be used for other asset purchases (eg. real estate).

Automated Savings

One of the best things with technology today is that it has never been easier to save.

My saving strategy couldn’t have been any more simple.  ING Direct, now CapitalOne 360, would pull the $20 from my checking account each week.  At the time, ING Direct was paying the highest interest rates of about 5% on their basic savings account.

My investing strategy was very similar and automated.  Sharebuilder would pull out the $20 from my checking account each week.  It would then purchase fractional shares of company stock in companies like DELL, BOFA, COKE, etc.

Automation was so helpful because you don’t have to lift a finger to take action once it’s in motion.  Set it and forget it!

Today, both of these accounts have grown significantly.

One cool app I’ve been seeing a lot of recently is called ACORNS.  This app lets you automatically save your change on transactions by rounding up.  Those funds are then allocated to stocks… pretty cool!

The Secret TWIST to Making it Work

Let’s use psychology to our advantage.

Think about it.  Does having money necessarily make you happy?

Sure and increased standard of living is nice, but I remember being pretty happy during my college years without a ton of money.  Realizing this, I only increased my standard of living a little bit when I started working.

I also continued this trend once I met my wife and we aggressively saved the majority of her income while living off of mine.

The beauty of this model is that we never felt like we were really sacrificing anything.  We were able to do most of what we wanted but were simultaneously saving up to 60% of our annual income some years all while slowly increasing our standard of living… just in very small increments.

So again, the SECRET to saving a lot is creating a situation where you DON’T feel like you’re sacrificing.

Humans are Adaptable

Having said that, I do know our culture and a lot of people fall prey to upgrading their standard of living TOO FAST.  So, if you’re ALREADY at a place like that, I’d suggest cutting back slowly.  Look for the incremental areas that don’t provide as much pleasure anymore and eliminate it.

Over time you will adapt and no longer think about it as much.

Finally, one fantastic trick to save money is to make smart adjustments when you receive a raise or annual bonuses.  Because these are new sources of income, you aren’t necessarily used to having access to it.  That’s an advantage!

Try taking at least half of it and allocating it to saving and/or investing.  The other portion you can use to increase your standard of living, but just don’t blow it all.  You will feel happy that you’ve increased your well-being, and also proud of yourself for saving the excess.

What if You’re in Debt?

For those of you in debt (eg. credit card or consumer debt), you should still save some money on the side for emergency situations.

But, after you have a cash equivalent of 2-4 months of expenses saved up, you’ll want to start chipping away at your debt using a debt ladder (this link will give you a much better idea of this concept than I can here).

Final Thoughts

Saving was my first strategy towards my goal of a million by 30.  I subsequently used other strategies to meet that goal, but without this basic saving fundamental, the rest could not have existed.

If you haven’t started yet, the next best time to start is NOW.  It may be a bit painful if you’ve never done it, but remember we are adaptable.  The more you practice, the better you’ll get at it.  And once it’s a habit, you’ll naturally adapt.

Remember, balance is key.  If you sacrifice too much, you’ll stop this process because you’ll feel too much pain.  If you don’t start at all, you’ll never have the chance to accumulate compound interest which is the easiest money ever made!

Readers, what are your thoughts on saving?  Do you do it currently?  How much?  What are the biggest challenges around saving?

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Michael

Hi, I have been blessed to take an early retirement in my mid-30's so I can focus on becoming a better father, blogger, and investor.

My goal is to help you find your personal path to financial freedom, and to enjoy the entire journey.

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26 Comments on “The Basics of Saving with a Twist”

  1. Great tips, Michael. It should be simple and obvious, but once you have that paycheck in your hand (or direct deposit in your checking account), it’s easy to start dreaming and shopping. I challenge physicians to live on half, and sill live quite well while advancing quickly towards financial independence.

    Cheers!
    -PoF

    1. PoF, you’re definitely sending a great message to physicians to live on half! I know a lot of highly paid professionals that don’t save a dime. Yet the additional spending doesn’t necessarily provide a commensurate increase in satisfaction. May as well get wealthy then. 😉

  2. Michael – Pay yourself first is an absolute must. Money can be very slippery. I took this to heart in my first job out of college, where I started maxing out my 401K from day one. I litterally have paid myself first, even before uncle sam gets his cut.

    I absolutely recommend that anyone that is close to graduating college or recently graduated…to start this habit early, as it will only get harder the longer you wait and more financial responsability you take on. My bet is even after maxing out your 401K you are still taking home more money than you ever have.

    My starting salary out of college was $52,000, so $17,000 off the top, still left me with plenty of money to pay my bills and live better than a college student.

    I would also encourage folks to leverage their careers to grow their incomes aggressively, as this is the fastest way to build wealth, is through a high income and high savings rate. A 50% after tax savings rate or higher is your aim.

    1. Excellent point, Dom. The early you can adopt this habit the better. It may seem inconsequential, but creating the discipline early on really makes all the different in a set it and forget it mentality.

      And, YES to strong growth in your career and income!

  3. Does your wife have a similar mindset to the aggressive saving/investing? Or was it something that evolved over time? This is one of the most common points of contention for most households–one person is a supersaver. It is not easy to change one’s mindset sometimes.

    1. Fantastic question, SMMD! It is hard to change people’s beliefs around money sometimes. Although my wife and I don’t see eye to eye 100% on the finances, we’re a good 85% in sync. We did talk about finances upfront early on and she was cool with living a nice, but simple lifestyle. So saving for her was easy. And once we were in alignment, she pretty much let me take the reigns. 🙂

  4. One thing my wife and I learned, as we are late to the savings game, is that an easy way to boost savings is to significantly reduce your monthly costs. When we sold our old home and bought one closer to our kids’ school and my wife’s work, we only looked at homes where we could reduce our monthly mortgage costs. This allowed us to pay of debt more quickly and then save the difference each month (plus the amount we were paying towards debt).

    1. Good point, Jeff. It’s easy for expenses to creep up over the years, so it’s a good practice to sheer them down occasionally. Most people will find there are things that don’t provide as much satisfaction as they thought.

  5. Great advice. I am a big saver, but need to do a better job of figuring out exactly how much I can automate away before I even see it.

    I will note, this isn’t easy! I thought it was before, when my life was a W2 and just me. Then I went a couple years with nearly 0 savings starting my business, a period with nearly all savings going to a ring/wedding/honeymoon, and now a more complex 2 income household. Just have to get the systems set up again!

    1. I’m sure you’ll get a smooth system in place soon, Brian!

      You could start out with something really small just to set up the process and increase it over time as more free cash becomes available.

  6. Great tips! Paying yourself first is an absolute must. I have a certain amount from each paycheck that is automatically put in a savings account. I don’t ever see it, so don’t miss it. Every time I get a raise, I make sure to bump up that savings amount by the amount by paycheck increased. If I can live on what I’ve been making, why not save that extra income?

  7. People definitely upgrade their standard of living too fast and too often. I always disliked the idea of saving a fixed percent of your income each month (say 10 or 20%). I don’t like it because every time you get a raise, you are spending 80%+ of that raise instead of saving.

    If a family is on a budget and are making ends meet, then one person gets a raise, I figure they can save half or more (or pay debt or whatever) and still use some for living style.

    Over time their savings rate will increase as a percent of their total income.

    1. Yeah, I completely agree, Eric. A raise is the prime time to accelerate savings without sacrificing anything. Better to save 80% of the raise and spend the extra 20% to increase your standard of living. 🙂

  8. Good post Michael. I’ve always felt that becoming a millionaire was something that just happens as a consequence of doing the right things with money (many of which you stated).

    Do those things long enough, and suddenly a million dollars appears! 🙂

  9. Great job keeping your lifestyle in check. I agree that’s the secret that a lot of people are missing. Spending money is fun, but life was fun when we were a poor college student too. Saving a big chunk of your income in your 20s is the best way to become a millionaire. Happy Holidays!

    1. Isn’t it amazing how we can be just as happy when we’re poor college students?

      Happy holidays, Joe! Thanks for being a fantastic example for others on the power of saving.

  10. Great advice here Michael! Currently, my wife and I are living off of my income while saving her salary. We’re also keeping our lifestyle in check by continuing to renting here in LA. We lived in a 1 bedroom apt for the first few years after marriage and then moved into a 2 bedroom. Our living expense is surprisingly low by LA standards. Though with a baby on the way, we may eventually look to move into something bigger or possibly buy a primary residence. Until then, we’re saving a large chunk each month by living modestly.

    1. Oh man, I remember living in a 1 bedroom with my wife. 🙂

      Great job, OB with your savings. I think it’s actually smart to rent right now and invest elsewhere as you have. Your new baby is going to be very lucky to have you as parents!

  11. Hi Michael,

    I must agree, you nailed it and I’m a person who like to save money and then invest into something, which can generate revenue. I love to save money and move with freedom. You have added more value to money hacks. Thank you for sharing these tips with us Michael.

    1. Hi Raj, keeping your principal intact and growing it aggressively is always a tricky balance. But, saving wisely can give you many more opportunities to mess up along the way. 🙂

  12. Nice article and was very interesting to read, thanks for giving such wonderful and helpful advice which will help people who are looking forward to save some money from their income. You need to upgrade yourself every now and then to have the grip in the market, doing savings too much wouldn’t make you much profit, so invest only in those things which you think are important to you! Think wisely before putting your savings into something which will give you good amount of returns.

  13. Since I am not married and have very less responsibilities, I am able to save most of the money I am earning currently. I also do not have much debt. However, i am planning to start constructing a new house this year for which I may need to take a house loan. I am not sure how much will I be able to save then. But for now, i am really happy with my savings. My plan for 2017 is to double my savings by earning more this year.

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