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The #1 Foundational Skill to Build Wealth

Published -
November 12, 2023

Back when I was in junior high school, I had a health class teacher who was doing her best to dissuade us from smoking cigarettes. One of her arguments was an economic one.

Here was her example: if instead of buying and smoking a pack of cigarettes at $1.00 per day, we saved the money, by the end of one year we’d have enough to buy a moped! Back in 1980, this sounded pretty cool and obviously it was a lesson I remember. Not that I was tempted to smoke, but I loved the thought of a growing savings account and the dream of buying something that I wouldn’t think I could afford.

We live in a society of instant gratification. Whether we want to admit it or not, many of us have a very real impulse toward “keeping up with the Joneses.” These behaviors run counter to what is the most foundational financial behavior of all—saving money. Living below your means (spending less than you earn) is vital to financial freedom.

Too often saving money is put on hold until sometime in the future. We’ll start after the promotion, after the holidays, after our next big vacation, house purchase, etc. The problem with this is there is always something coming up that gives us a good reason to wait.

We also live in a world where we are bombarded with information about how to get rich or make more money through some kind of investing fad or tactic.

Unfortunately, people don’t spend enough time on step #1 which is to save money. If our “looking for a better investment” energy was directed toward saving more, we’d most likely come out way ahead in the end.

How to Get Started

Assuming you aren’t saving or saving enough, there are tactics you can use to get started.

Saving money takes discipline. Consciously making the decision to put away money every week or month would be difficult for anyone. The best way to counter this is to automate the process and forget about it.

Automating the process is as simple as saving into a 401k (or equivalent) through payroll deductions at work. You can also, and should for further tax benefits, automate contributions into a taxable investment account, HSA, and/or Roth IRA.

Here is how you can set up auto saving and investing outside of 401k payroll deductions:

  • Have your paycheck automatically split between a savings account (20% less what you’re contributing to a 401k) and checking account (80%).
  • Learn to live on 80% without taking on additional debt or pulling money from your savings. This is referred to as “living below your means.”
  • Open an online account with Fidelity or Schwab.
  • Set up a monthly automatic transfer from your savings account into your new investment account. The goal should be to invest at least 15% of your income annually for retirement.
  • Choose age appropriate (and mostly stock/equity) index funds for your investments.
  • The 5% that stays in your savings account will create an emergency fund so you won’t need to rely on credit cards or debt when unexpected financial needs come up—and they will.
  • Once you have a “floor” emergency fund balance, continue to contribute 5% to save and pay cash for large purchases like vehicles and vacations.

Regardless of your age or whether you’re on track, don’t delay saving money—your future self will thank you! If you’re in your 50s and haven’t saved much, start saving more now. If you’re young and have decades to save, start saving now.

I’ve never heard anyone complain about saving too much. Imagine being retired and thinking you saved too much. You could help your adult kids purchase a house, pay your grandkids’ tuition, make up for all those years you didn’t tithe to church, etc. What a wonderful problem to have.

I Can’t Afford to Save Money!

This is the feeling of many, but if they do a deep assessment of how they are spending money, there are likely things that could be cut in order to save—as long as it’s wanted bad enough.

I’ve met people at just about every income level who are broke and others with the same income who are doing very well. What this means is there are people with incomes at 80% of yours who are living debt-free with ample savings and investments. It comes down to an honest assessment of what expenses are wants and what are needs. Making adjustments can seem impossible, or on the other hand, viewed through the lens of short-term pain for long-term gain.

Some tips to get you on track if you are behind:

  • Save/invest a significant portion of every pay increase you receive.
  • If you receive any type of windfall such as an inheritance or bonus, here is a great way to split it up: 30% toward debt (if none, distribute to other options); 30% toward emergency fund/savings; 30% toward retirement—invest for long-term; 10% for fun/family experiences
  • Consider a side job for additional income.
  • Track all your spending and then decide what you can cut in order to save.
  • Take a full month off from discretionary spending—no eating out, Amazon shopping, new clothes, etc. Repeat periodically.
  • If you’re married, talk about finances with your spouse. Agree to talk about and agree on any purchase over a certain dollar limit.
  • Delay large purchases.
  • Choose a used car over new. Many millionaires never purchase a new car. A good strategy is to get a quality two-year-old car and drive it for five to eight years. Repeat.
  • Choose a “staycation” over an expensive vacation. There are probably many sights you haven’t seen that are close to home.
  • Practice humility. If you’re behind on saving for retirement, have an honest conversation with family and close friends. True friends will support you and appreciate the honesty.
  • The people with whom we surround ourselves can have an enormous impact on our finances. Choose wisely.

Whether you have your eye on a bigger house, early retirement, or a faster moped, being intentional and financially wise about spending and saving is the key to financial freedom.

Ken

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