“Money is a terrible master but an excellent servant.”
–P.T. Barnum
For most people, saving money is like dieting, but less pleasant.
However, some good news: you don’t have to adopt the financial equivalent of the cauliflower-only-diet to make savings work.
Savings are important. Saving money is a very critical part of achieving financial independence. Savings matter because they:
- Provide a financial cushion if things go wrong.
- May be used for investment to provide even more income.
- May eventually create enough income to allow retirement.
- Can be used to help others if needed.
- Provide options.
But wait. Can’t a person achieve success and spend every dime? Sure—as long as they keep working. But what if the job market changes? Or what if they get sick, or what if something unexpected happens? Without work, there are still bills to pay, and no salary to fund them.
That is why there is a growing movement aimed at achieving financial independence early. Called FIRE (Financial Independence Retire Early), this group advocates saving up to 50% of income or more per year. The goal is to achieve a net worth of approximately 25 times yearly earnings as soon as possible. At that point, it is feasible to consider retiring at a very young age—30, or 40 or 50.
The advocates are on to something—a bit extreme in their approach, but not wrong.
After all, take a hard look at the terrible situation we are in as a society. We are a nation of underachieving savers. The national savings rate (2015) was only 4.9 percent according to Global Finance Magazine. Moreover, other reports show that most Americans are only a job loss away from a major financial problem. That is not good.
Since this first series of posts is all about fully describing the financially successful, you may have correctly inferred that their patterns of saving are different from the rest of us. According to an analysis performed by Fidelity, the average millionaire saves 14% in the US—about nine percent more.
To retire early, most experts say you do need to have about 20-25 times your yearly expenditures saved absent income from other sources. So, 14% per year will get you there, right?
I will not go through the math, but that is pretty much on target–IF you want to retire at age 60 to 65, not 50. To retire at 50 your savings rate should be in the 20 percent range, AND, you need to have side income or other investments.
We did, and it worked. So, don’t hate me, just understand what you need to do.
But first, note the disconnect: the wealthy are not saving nearly as much as FIRE devotees. So, what is going on? Are FIRE people masquerading as successful? Are millionaires actually savings slugs and underachievers?
No to both. The respective approaches of both groups are just different. Most millionaires take the more conventional path of saving longer, rather than concentrating on saving extreme amounts of money in a short period of time. I am speculating here, but they also appear to be concentrating more on investing in revenue-generating endeavors such as passive investments that partially replace salary upon retirement.
There are advantages and disadvantages to both approaches—something I will tackle in a future article in the Opinion section.
But, back to the main point: savings are important. So for those who want to achieve financial independence, disregard what you may think about what successful aggressive people actually do. Those who aggressively attack life as free-spending passionate movers and shakers are depicted favorably by the media, no matter how flawed they are. But most of the successful know savings are one of the most aggressive things you can actually do to take control of your life.
Going to dinner? Think of your conservative coupon clipping fellow diners as the most badass aggressive people you know. Achieving savings is one of the most aggressive ways to confront the future AND the present.
Now, let’s be realistic too. Some people cannot make ends meet because they do not get paid enough. Still, a fair number of people who cannot save are actually suffering from a failure to set priorities. While a lot of these folks end up poor, they are not always earning a bad salary. Their lives should be better. Hopefully, some of the guidelines in MMH will help.
So regardless of how you feel about this article and the subject of money, here is the tragedy: many people use their resources on unfocused existing instead of pursuing what really makes them engaged and happy. Yes many of us are trying to live every moment as if it will be our last–but are ACTUALLY living it by spending money on low pleasure, low priority expensive junk.
If we enjoy what we spend our time and money on, that is great. But do we really? Many don’t.
Think of the financial side as if it were like that most Scottish of games: golf. The idea is not to outscore your opponent; it is to use the least amount of resources (shots) to complete a task (filling 18 holes). In the case of this blog, the goal is to get you 90 to 100 percent of the pleasure in life, without spending all you have to get it.
In future posts, I will get much more specific about savings strategies.
As for me and the people who follow this blog, I want it all—to stop and smell the roses AND achieve solid goals. And, I want to avoid that all-cauliflower diet at all costs.
SUMMARY:
- For most people to retire early they need to save approximately 20 percent of their income.
- Saving money is usually achieved by living for both the present and future in a balanced way.
- The approach of consistently banking savings over a long period is how most people attain financial independence.
ACTION PLAN:
- Set savings goals.
- Avoid spending money on useless junk. Figure out what really gives you satisfaction. Satisfaction is not always about purchasing something.
- Stay informed. There are lots of ways to save money, but it is important to remain alert to them.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice is suitable for your circumstances or investment style.