Saving is the pinnacle of financial freedom. You must save in order to live a comfortable life, retire happily, and escape the world of work.
Why?
Why save? You must have a reason to sacrifice in the moment for a better tomorrow. Here are some reasons why you want to learn how to save.
You have important goals that you want to achieve!
You are sick of living paycheck to paycheck!
You are tired of being broke!
You want to escape a job that you can’t stand!
You want to do something meaningful with your life!
You want something more. You want financial freedom!
How?
The how is a much bigger question. Most people think saving in a bank is good. I will show you why this is not a good idea. The only way to get financially free is to know how to save properly.
Pay yourself first as soon as the money comes in
Make it automatic without any action on your part
Live below your means after taxes!
Make it a lifestyle by saving first, while spending second
How Much?
It is important to know how much to save. Shoot for a goal. Budget. Figure out what you can do. We all start with a job that pays us an earned income. The financially successful people save a portion of that earned income and invest it wisely in low cost investments (no-load index mutual funds) owning bonds, stocks, and real estate. Gradually, over time, compound interest does its thing and your money starts making money. One day, your passive income will trump your earned income.
5% (gross income) will help you survive
10% (gross income) will bring you plenty of success
15% (gross income) will bring you financial freedom
20%+ (gross income) will allow you to escape the world of work (living on your interest earned instead of income from a job)
Where?
Not the bank! A bank/credit union is a place to get a loan (and to have a basic checking account), not a place to grow your money.
Cash in the Bank/Credit Union (no – inflation will eat it up)
Cash in a Money Market Fund (current interest rates tell us no)
Bonds (keep it liquid with short to intermediate term maturities)
Stocks (focus on no-load index mutual funds in retirement plans)
Spender, Saver, Investor ($30,000 salary)
| Tim | Beth | Years | John | Holly |
|---|---|---|---|---|
| Saves 0% Spends 10% beyond his paycheck | Saves 5% (Good) Earns 10 (Great) | Monthly Income: $2,500 | Saves 20% (Great) Earns 0% (Mattress) | Saves 20% (Great) Earns 10% (Great) |
| ($3,600) | $1,650 | 1 | $6,000 | $6,600 |
| ($61,930) | $29,461 | 10 | $60,000 | $117,847 |
| ($213,226) | $101,598 | 20 | $120,000 | $406,394 |
| ($605,648) | $288,703 | 30 | $180,000 | $1,154,812 |
Early Saver
Incredible visual showing how important it is to save from age 25-35. Look at how much more money you have even if you completely stop saving after age 35!
| Age | Investment | Year End Value | 8% Annual Return | Age | Investment | Year End Value |
|---|---|---|---|---|---|---|
| 25 | 5000 | 5400 | 25 | 0 | 0 | |
| 26 | 5000 | 11232 | 26 | 0 | 0 | |
| 27 | 5000 | 17531 | 27 | 0 | 0 | |
| 28 | 5000 | 24333 | 28 | 0 | 0 | |
| 29 | 5000 | 31680 | 29 | 0 | 0 | |
| 30 | 5000 | 39614 | 30 | 0 | 0 | |
| 31 | 5000 | 48183 | 31 | 0 | 0 | |
| 32 | 5000 | 57438 | 32 | 0 | 0 | |
| 33 | 5000 | 67438 | 33 | 0 | 0 | |
| 34 | 5000 | 78227 | 34 | 0 | 0 | |
| 35 | 5000 | 89886 | 35 | 5000 | 5400 | |
| 36 | 0 | 97076 | 36 | 5000 | 11232 | |
| 37 | 0 | 104843 | 37 | 5000 | 17531 | |
| 38 | 0 | 113230 | 38 | 5000 | 24333 | |
| 39 | 0 | 122288 | 39 | 5000 | 31680 | |
| 40 | 0 | 132071 | 40 | 5000 | 39614 | |
| 41 | 0 | 142637 | 41 | 5000 | 48183 | |
| 42 | 0 | 154048 | 42 | 5000 | 57438 | |
| 43 | 0 | 166372 | 43 | 5000 | 67438 | |
| 44 | 0 | 179682 | 44 | 5000 | 78227 | |
| 45 | 0 | 194056 | 45 | 5000 | 89886 | |
| 46 | 0 | 209581 | 46 | 5000 | 102476 | |
| 47 | 0 | 226347 | 47 | 5000 | 116075 | |
| 48 | 0 | 244455 | 48 | 5000 | 130761 | |
| 49 | 0 | 264012 | 49 | 5000 | 146621 | |
| 50 | 0 | 285132 | 50 | 5000 | 163751 | |
| 51 | 0 | 307943 | 51 | 5000 | 182251 | |
| 52 | 0 | 332578 | 52 | 5000 | 202231 | |
| 53 | 0 | 359185 | 53 | 5000 | 223810 | |
| 54 | 0 | 387920 | 54 | 5000 | 247115 | |
| 55 | 0 | 418953 | 55 | 5000 | 272284 | |
| 56 | 0 | 452470 | 56 | 5000 | 299466 | |
| 57 | 0 | 488667 | 57 | 5000 | 328824 | |
| 58 | 0 | 527760 | 58 | 5000 | 360530 | |
| 59 | 0 | 569981 | 59 | 5000 | 394772 | |
| 60 | 0 | 615580 | -183826 | 60 | 5000 | 431754 |
| Total Invested | 55000 | -75000 | 130000 |
The person who started at age 35 has to invest over double the amount of the 25 year old. And still has less money! That is the power of compound interest. Save early. Save properly. Retire happily.
Understand the rule of 72.
You take 72 and divide it by the average return on your money and you will see how many years it will take you to double your money. For example: If you average 8%, it will take you 9 years to double your initial investment (72 divided by 8). $10,000 turns into $20,000 nine years later for example. How long will it take to double your money at .5% (a nice return in the bank at this time)? 144 years! That’s why your savings does not belong in the bank.
Paying off debt vs saving
If you are deep in debt, consider taking 20% or more of what you would have saved and instead put it toward your loans. Saving money in a bank account earning .2%, while paying 6% or more on debts makes no sense at all. I recommend paying off debt at an accelerated rate if the interest rate on that debt is 6% or more. If your interest rate is below 6%, consider taking that extra money and save it in retirement accounts at work (401k for example) or outside of work (Roth IRA). Ultimately it is your call on how you approach paying off debt vs. saving money. Decide on a interest rate number and then stick to your plan.