Hopefully by now we have established the benefits of saving at least 20% of your salary for the rest of your working life, and investing those savings over the long-term.
In case you need a refresher, the benefits are:
- you may become a millionaire
- potential to exit the rate race sooner
- At the bare minimum, you’ll create some financial security for yourself
However, you might be like most people, getting to the end of the week, wondering where all your money went.
I’m no Saint, there are months when I don’t put anything into savings. But the goal doesn’t move -I always aim to save 20% of my salary.
I don’t stop saving just because I went backwards one month. I use that wasted month as motivation to get back on track.
Savings start with paying yourself first
In my opinion, the ultimate way to increase your savings rate is to pay yourself first.
It’s a classic financial planning principle, which basically means, when you receive your pay, you should automatically transfer a proportion of your earnings into a separate savings account or into your preferred investment.
You literally pay yourself first by paying the desired proportion of savings into an account you vow not to touch.
The next bit is important - don’t spend those savings.
Paying yourself first is a psychological trick for the brain. It forces you to adjust to living on a lower level of income, which helps keep your living expenses under control.
If you put your savings into a different account and only spend what is left, it makes you really think about your next purchase.
Whatever your savings goal, set up a new account in which you transfer your savings into as soon as you get paid.
Do this for the rest of your life, and you’d be surprised how quickly the cash accumulates.
After a while, you get use to living on a lower amount, and you’ll start to wonder what you even spent the money on previously.
Control your expenses
When it comes to growing your wealth, your savings rate is a much better indicator of your future financial success compared with how much you earn.
“It’s not how much you earn, it’s how much you save that really counts”
Just because you earn a lot, doesn’t mean you’ll be rich. I know plenty of people that earn a huge wage but spend the whole amount. They are slow to accumulate wealth because their spending is out of control.
Conversely, I know plenty of people that don’t have a huge wage but are fast approaching a net worth of $1million.
When it comes to reducing expenses, focus first on the big ticket items - taxes, housing, transport and food. The gains you can make here may be substantial.
Taxes - for most people, taxes are their biggest expense. It makes sense to legally reduce these as much as possible. Get educated, use a tax agent, and for God’s sake, please keep your receipts!
Housing - As a rule of thumb, try to keep your home loan repayments to less than 30% of your after-tax salary. Any more and you are at risk of being under financial pressure, plus you want some surplus cash to pay off your home loan faster or to invest! If you’re renting, rent the cheapest place your ego can afford!
Transport - I’m always amazed at the number of people under 30 years of age driving around in BMWs and fancy cars. When they hear that I saved a 20% deposit and own my place they are shocked. People often wonder where their money goes. You can start reclaiming some of your funds by driving a cheaper car.
Food - Meal prep. Learn to cook. Eat out less regularly. Start a lunch club. Not only will you gain savings, you might also find you feel a little healthier too. Seriously, if you add up how much you spend on food for the year, you’d probably be shocked at how much cash you go through. Just remember, for most people, one bought meal is equivalent to an hour’s worth of work. If you buy out 7 days a week, you’ve worked a whole day just to buy food.
Reduce or eliminate expenses that give you no value:
Once you’re certain that you have the big expenses under control, it’s time to start taking control of the smaller expenses.
You’ve got to be careful here. Don’t become blasé and think that the small expenses don’t matter. I can assure you that they add up over time!
The truth is, you’re not going to become a millionaire by giving up your morning coffee, but having a mindset of not wasting money will surely put you on the path to $1million.
I encourage you to ruthlessly reduce expenses that don’t add value to your life.
Everyone has expenses that they have to buy because it’s part of their modus operandi. But there are going to be examples where it doesn’t matter if you buy a brand name or a premium product, you just need something that gets the job done.
Does it really matter which washing detergent you use, which company provides your electricity? All you care about is that when you turn on your lights, the power comes on.
In this post, we cover ways to reduce your expenses more, but the mindset is clear - for the expenses you don’t care about, reduce them mercilessly.
Think about what really gives you fulfilment in life, and prioritise spending in those areas. For everything else, find a way to reduce expenses.
Think about things in cost per use:
Some products may require a higher initial outlay, but may last significantly longer than an inferior product.
You should buy these products as they are much more affordable over the life of the product.
Buy things that help you save money elsewhere:
Every now and then, a product comes along that can really save you money. It might be a bike that saves you transport costs or solar power which saves you electricity.
My wife really wanted an electric scooter for Christmas one year. At $899 it was no cheap scooter, but she committed to using the scooter to get to work. The savings here were huge - less petrol, no parking fees, less wear and tear and maintenance on the car. After 6 months of use, the Scooter had paid for itself. Everything after that was upside.
Another way of thinking is that she got this Scooter for free, because it helped her save money elsewhere. Everyday she uses the Scooter from now on, she’s saving money. Plus, how much cooler is it to take a Scooter to work than being stuck in traffic!?
Life is about balance
It’s important to enjoy life along the way. We can’t all wait until some magical time in the future when we are rich enough to indulge. The promised time may not even come.
Life is about balance. It’s about balancing the desires of now to give yourself an even better life in the future.
As a general rule, try to appreciate what you have, rather than worrying about what you don’t have.
There are many things in life that are free. Walks with your spouse and dog, enjoying nature, reading a book from a library, catching up with friends.
The best part is, when you get the balance right, saving doesn’t feel like deprivation.
Most people spend their lives wondering where their money went.
Their wallet feels like a sieve, constantly letting coins slip through.
Chances are, they are living in a house that’s beyond their needs and driving a car that’s beyond their means, living a lifestyle that they can barely afford.
When you’re building wealth you’ve got to ask yourself, what’s more important? Being rich, or looking rich?
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