Saving is the foundation of investing. There's so much talk about how important investing is and the value of compounding which is true. Other people warn about having cash in the bank and how its value is constantly being eroded by inflation which is also true. But the single most important number in investing is the amount you have invested (assuming a gain of any size over a lifetime). So you have to be able to earn it and keep it. On top of that, the discipline learned during the process will be invaluable to your investing career. A bad investor with $3 million invested will most likely do better than someone twice as good that has $1 million invested. The people that advise against saving are usually pushing a product that costs money they want you to use your savings to purchase or they’ve already made the money and saved it and are looking at it through their lens and forgot how they ended up in that position.
Every time you invest money in something other than yourself, you're surrendering that money to the market. Most of the time you have no control over the value of what you're investing in. It can go down just as easily as it could go up and if you're investing your savings for the short term and plan to withdraw them later for another use, you're very vulnerable to the market conditions.
If the market is down when you need or want to pull the money out a chunk of your savings has gone to waste. It's also very expensive to enter and exit markets. There are a lot of businesses taking a fee every chance they get which add up fast. Meaning you must make a certain amount just to break even.
Saving discipline: Delayed gratification. The value of your goal to you has to be greater than the satisfaction that most things can be provided short term. The greater the value you attach to the goal, the less distractions you will succumb to and the quicker you will achieve it. Think back to the last unnecessary purchase you splurged on for immediate gratification. Might have been a car, an expensive meal, jewellery, clothing etc. How long did the happiness and satisfaction of the purchase last? How does that compare to progressing towards or achieving your ultimate goal? Whatever it is, financial freedom, retiring your parents, education for your children etc. They're great reasons but if you ask yourself why once more to find out why you want to achieve that, I think you'll find the main driving factor.
Look at all purchases through the lens of time worked rather than dollar cost. I did this early on and it helped me save my first deposit. Instead of lunch costing $15 I worked out it cost me almost 2 hours of my $8/h apprenticeship wage (in 2011). Knowing that 2 hours of work that day was irrelevant made it an easy decision. The less you make and the more your job sucks the more effective this is. Work out your hourly rate and decide if the purchase you're about to make is worth the time sacrificed.
If you're extreme, like me, you can take it to the next level and take your daily income and average it out over 24 hours to get your true hourly rate. You have 24 hours to produce income each day. If you make $100 an hour for 4 hours work and someone else makes $50 an hour for 8 hours - You're in the same financial position when the day ends. $50 an hour for 8 hours = $400 / 24 hours = a true rate of $16.67 an hour. Once you start making more money this strategy isn't as effective.
The next step is to take the potential dollar cost of the purchase and plug it into your investing strategy. Let's take a $30 meal for example and use my investing strategy to illustrate it. I know I can at least double my money on a renovation. $30 x 2 = $60 worth of equity. I can leverage that 5x or 10x when used as a deposit for another purchase $60 x 5 = $300 worth of buying power. $300 for a $30 meal is usually enough to realise it's not a good deal. But again, you can take it further and apply capital growth over the long term. $300 growing at 5% PA over 30 years = $1,297 dollars. You can plug it into any formula. Even $30 in the share market without leverage growing at 9% PA over 30 years = $398. Not everything has to fail these tests. There will be times where it is well worth the money missed. It's all opportunities and costs. The point isn't to stop doing the valuable things it's to be intentional with your spending. Stopping and thinking what the real cost is to the bigger picture before we effortlessly swipe our cards and sign up to subscriptions.
Disclaimer: Saving $10 million in cash isn’t the goal. It’s to develop the disciplines to save any amount of money you like so you can spend or invest it however you like.
How much should you save? That’s up to you. For someone starting out I think a good guide is enough to buy a house. I personally love property and think it’s the greatest vehicle on the planet but that’s not why I think it’s a good idea. My reasoning is once you have that much money you have all the options available to you. You can invest in shares, you can invest in your own business, another business, buy property etc all the options are there so you’re not limited by your options. The other factor is the time it will take. While you’re saving this amount, you’ll no doubt be researching ways to invest once you finally do. Enough time to research and consider all options making the best educated decision based on your goals. Rather than rushing into what you can when you can, based on minimal information.
You won’t find a section on this blog that categorises savings as a % of income. In my opinion, all that does is encourage lifestyle creep. Living expenses cost what they cost. For someone making $500 per week the % of that spent on food and rent for example is huge. Does that mean they’re failing if accommodation is more than 30% of their income? Definitely not. Is someone that makes $20,000,000 spending $6,000,000 on their mortgage every year a good saver? I don’t think so. When it comes to acceptable or recommended expenses a lot of different factors come into play specific to individual situations and it’s hard to speak on broadly. I think the expense calculations should be done separate to income and based on values. What’s the minimum requirement to put yourself in a position to achieve your long term goals? Anything extra can be looked at through the lenses discussed above: time cost and opportunity cost if it was invested instead. Once that foundation has been set it’s simply about continuously increasing income and keeping expenses at that pre-determined amount.
Make it visible. Our spending has become invisible. Tapping a phone, tapping a plastic card, card details saved by the browser, buy now, pay later, we’ve even automated our spending with subscriptions.
I love physical cash, I don’t know why. I think it feels more real. Withdrawing spending money as cash and handing it over the counter when you make a purchase can help make the spending visible. It’s not a perfect solution as less and less places accept cash.
The other way is to simply keep a record of all your income and expenses. You don’t need a fancy app or anything like that excel works just fine. Constantly I’d even go as far to say that physically writing it is more painful and memorable than typing. Just do what works best for you - the most important thing is that you’re regularly reading through your transactions and recognising where the leaks are. As your saving improves watching the total number grow over time is very motivating. You didn’t have to do any extra work and you have extra money.
$1 saved is $1.30 earned (depending on your tax bracket)
I’m a big fan of increasing income, I think it’s equally as important as saving but I think people use that focus as an excuse not to worry about saving. To spend a dollar with the attitude of making an extra dollar to replace it requires $1.30 of income since 30 odd cents will be paid as tax. If you don’t save, you essentially have to work 30% harder to be in the same position as you would be if you did save.
We’re coming off the back of a huge boom so I’ll get some flak for suggesting saving was better than investing the last 2 years and people will be eager to point out some figures. If we were in the middle of a significant downturn I’d look like a genius. But last I heard the stock market has lost the gains made during the pandemic so maybe I won’t look crazy posting this now.
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