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.
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!
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
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).
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).
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?