Inspired by Dave Brown of Boyinaband, we will roll out a series of primers over the next several months. This new series will focus on the basic of such vital topics as how to start saving money, understanding stocks, taxes and retirement presenting foundational knowledge that is often neglected. We do this in recognition that common knowledge is only “common” to those fortunate enough to have benefited from it. By adding our voice to this basic information, we hope to make it universal and strengthen the community.
We start today exploring the premise of saving. Far too many are never taught why they should save or the benefits and opportunities it can bring. We hope you will add your voice to the conversation and that they inspire others to follow along as we later delve deeper into each topic.
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Table of Contents
Why Should I Start to Save? Why is Saving Important?
Everyone has their own reasons to start saving money. Some seek to escape the daily grind of their current job. Others strive towards a day where they can afford the time and freedom to pursue their passion. Often, savings simply align with motivations, which are universal.
Saving can protect us when life brings the unexpected. All of us will experience a lost job, a car accident, or health issues for ourselves or loved ones. Without savings, these situations can layer debt on top of all the inherent stress. We save for peace of mind.
Beyond emergencies, having personal savings can bring a sense of confidence. Having a safety net empowers us to be more outspoken at work and in our daily lives. Freedom to speak our mind often allows us to be happier and more productive.
Saving now can afford us freedom later in life, buying us time with friends and loved ones. Ensuring that when opportunities arise for meaningful moments or experiences, we can take them. Time is an invaluable resource. Saving allows you to maximize it when it is most meaningful to you and ensures that these moments don’t pass us by.
We save for legacy, to provide opportunities for our loved ones after we are gone. To reduce their stress and allow them the freedom to become the best versions of themselves.
What Age Should You Start Saving Money?
No matter where you are in life, the best time to start saving money is now. When you are not making a lot of money, it’s tempting to put savings on the back burner. Why work so hard to save $500 a month now when it will be easier to save $1000 a month once your career is more established?
It all comes down to time. Time is your greatest asset in growing your savings, and the primary factor behind the beauty that is compounding interest. Compounding interest allows your savings to grow, not at a static rate as with income, but increasingly over time. As your savings earn a return, that money also goes to work for you, earning a return upon itself.
If we manage:
- to save $600 a month, starting at 25
- Average a 5.5% annual interest rate on that money
- Continue until the age of 65
We have become a millionaire saving just $600 a month because we started early and saved consistently.
If we wait to start saving money until we have a better-paying job at 35, we would need to save around $1200 a month to hit this same target.
The best of both worlds would be to save $600 a month at 25 and then up our savings to $1200 a month once our salary grew. This combination of time and increasing our savings alongside our income sets us for life with over 2.5 million dollars.
How Much Do You Need to Save to Retire?
The common guidance is that you will need ~80% of your salary each year in retirement. The AARP echoes this:
The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security (although you may have to pay some taxes on your Social Security benefits), and you won’t be shoveling money into your 401(k) or other savings plan. In addition, you’ll save on the usual costs of going to work… such as new clothing, dry cleaning bills, commuting expenses…
While a good rule of thumb, there are many factors which will make your retirement unique to you:
- Perhaps you plan to retire to a cheaper area
- You may have saved your entire life so you can travel the world in retirement
Your goal should be the amount which will fund the opportunities and lifestyle important to you.
Where Will My Retirement Money Come From?
The first source of retirement income for many will be Social Security or pension funds. You can get an estimate of what your SS benefits will be through SSA.gov. If you have paid into a pension fund, you will want to reach out to your HR department who should be able to refer you to a website to check your current balance.
Why You Should Not Leave Your Money Lying Around
CNBC found that 1 in 5 Americans store some percentage of their savings in their home. If you follow this habit, please consider putting that money to work. Money sitting in your home loses value year over year because of inflation. There are many contributing factors to inflation but at its most basic, as the Federal Reserve introduces additional money into the world the value of each dollar goes down. In the US, the current goal for inflation is around an average of 2%. Every year your money sits around in your home it loses ~2% of its value.
Most of it is also likely to not be insured in case of a fire or theft. It is common for insurance to only replace up to $200 worth of cash. It is also easy for money to be forgotten about or misplaced, as anyone who has recently moved can attest.
How Much Should I Save?
If you truly want a concrete goal experts will point you to the 20% standard. The genuine answer is to save as much as you can while enjoying life. Each dollar you save now will buy you freedom and time in the future. If you have a once in a lifetime chance to study aboard, or a chance to celebrate a meaningful moment in a friend’s life, take it. Saving is meant to provide freedom, not to make you miss important moments as they come.
Are There Things I Should do Prior to Saving?
Pay off Bad Debt:
Before you build up your savings, look at your current debts and the interest rate on them. If you are carrying any debt with an interest rate above 4%, double down on paying it off as quickly as possible. Debts of a higher interest rate can snowball extremely quickly, getting out from under them now can save you years of stress and effort.
For debts with a more modest interest rate consider the balance. If the balance is low enough, you can pay it off in a few months, and it will bring you peace of mind, do it. For larger debts locked in at a low rate, such as a good home mortgage, make sure you are making the minimum payments. From there you can assess if you would rather split your remaining income between paying down the balance and savings, or focusing on one.
How do I Start Saving Money?
After paying off your high interest debts, turn your attention to creating an emergency fund in a basic savings account. We explored this key step a few months ago saying:
An almost universally recognized priority is to establish an emergency fund which you can access without resistance. Most advisors will recommend between three and six months’ expenses, with some extending that to six to nine months’ expenses. This money will lose out to inflation over the long term, but the importance here is liquidity; you need to be able to access this money when you need it. Find the best high yield savings account you can, no, the difference between 1-2% interest and the more standard.05% will not make you rich, but do the best you can and take comfort in knowing your money will be there should you need it. Having money you can access, at any time, can bring peace of mind and reduce stress, both of which are invaluable.
The Inimitable Path – Becoming a Millionaire- Core Steps in the Teen Years – https://www.inimitablepath.com/becoming-millionaires-steps-before-20/
Once you have your emergency fund in place, you will want to put all additional savings to work for you. We will explore the myriad of options available to you in a future article.
Where Can I Find Capital to Start Saving Money?
The multi-talented Invest.Immo recently shared their thoughts on understanding where your money comes from and where it goes. Their most recent work can be seen here. Their work is published in both German and English with a language selector at the top of the page.
Cashflow Control and Reducing Costs With Life Hacks to Boost Your Savings
Whatever your current situation looks like, it is always possible to save some money. To do so, you need to monitor your incoming and outgoing cash flow. Even if you can’t increase your income, decreasing your expenses will provide money for your savings or investment account. This is easiest done with the good old pen and paper approach or some suitable app. (Editor note: We personally use and recommend Personal Capital. This free application connects to your accounts to track your income and expenses in one location. If you use this referral link (use code k92370) you will receive $20 upon registering and linking a qualified investment account.) Put everything into reasonable spending categories to get a clear picture.
The first step is to just monitor your spending habits without judging. I think it is important to accept the current situation as your starting point. The second step is to identify costs you can reduce. This usually is a very personal matter, since it means identifying the things that are most important to you and cutting out the rest. If, for instance, doing things yourself is your cup of tea, that can give you a tremendous advantage in reducing your expenses. Here are some DIY life hack ideas for your inspiration:
- start cooking – or even grow your own food
- don’t use expensive cleaning equipment or products: citric acid, vinegar and washing soda work most of the time better and are much cheaper
- clean the house yourself instead of having a cleaner
- repair things to prolong their lifetime
- set up your own fitness program instead of going to an expensive gym
By reducing your costs, you will free some of your money for saving and investing. Start small and get the ball rolling. Changing your spending habits often leads to other good new habits as well, that can have a great impact on your life’s quality.
-immo.invest
Finding a Balance-Giving Up What You Won’t Miss
You don’t have to have to scrutinize every purchase. Enjoy life, but there is value in having a sense of where your money goes. What are you paying for that you might not miss? An unused streaming service, a cable subscription you use less and less, an auto pay membership you never got around to cancelling? Take the time to cut them now and enjoy the extra cash flow.
For the things you fear you would miss, try cutting it by 10% for a couple of months and see how it feels. Do you love to eat out? Perhaps you can meet friends for lunch or at happy hour. Do you often meet friends/coworkers for drinks? Drink one ahead of time at home, and one less at the bar/lounge. You still get to drink together and enjoy their company, but that first drink was so much cheaper.
Allow Yourself to Appreciate Your Progress
Unless you have high positive cash flow, saving is a long-term grind and your goals will, at times, appear unobtainable. Progress is often slowest at the beginning, at just the time many could use a sign their efforts are being rewarded. It is easy to focus so much on where you want to be that you lose sight of how far you have come.
It’s important to track your progress, not obsessively every day, but perhaps every payday. Allow yourself a few moments to appreciate how far you have come and the effort you put in to get there. Set meaningful milestones and reward yourself in a way meaningful to you upon reaching them. This not only allows you to recharge, but can keep you motivated along the way.
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