Let’s Talk About Saving Money!
As investors, we all know the importance of saving money. Simply put, the more money that we have, means the more money that we can put to work making us more money. The faster that we can accumulate money means the sooner that we will have financial freedom and can literally do whatever we want with our lives.
I once made an analogy to my 10 year old niece. Some people may say that she was a bit young for me to be telling this too but I think the sooner that a person can wrap their head around this concept the better of that they are.
That simple analogy went like this. In life, you are trying to earn and accumulate as much money as possible. Everything and everyone else in the world is trying to take it from you!
While she may have been a bit young to hear this, I still think that she understood exactly what I was trying to get across to her.
In the quest to accumulate money, one very important question seems to come up quite a lot. So let’s start by addressing that question first.
Should I Save More or Earn More?
This question has been debated more times than anyone can even count. Everyone is going to have their own opinion about it but I am going to layout mine and you are more than welcome to give your opinion in the comments down below.
Simply put I think that you need to do both.
The more that you can earn means that you will have the ability to accumulate wealth faster but making all that money does you no good if you are not able to save any of it.
So it is very important to do the following. Increase your skill set so that will warrant you making more money at your job. Work on building that business or side hustle that will produce your more money. These are only some of the ways that you can increase your income by earning more.
Now as you are increasing the amount of money that you earn, it is very important to also be increasing the amount of money that you save.
This part is very important because as you save more money you will then be able to put your money to work for you.
By investing your saved money, you will then be increasing your earned money which only helps in building your passive income which helps get you to financial independence that much faster.
How Much Should I Be Saving?
Save as much money as you can!!!
Under that means within reason. What I always tend to recommend is to start by saving a little. You don’t want to save so much that it is causing you to get behind on your other expenses. So even if it is just $10 or $20 a week, just start by saving something.
After a couple of weeks, if your saving hasn’t affected your standard of living then I recommend for you to increase your savings rate.
If you incrementally increase your savings rate over time you probably will not even realize that the extra money is missing each week.
One mistake that a lot of people make is once they get a raise at work or switch jobs to make more money they experience lifestyle inflation. Simply put maybe they received a promotion to management, they feel like they need to be driving the new Mercedes like all of the other managers. The problem here is that them earning more money did nothing for their savings rate.
So I always advise to try and fight lifestyle inflation. When you get the promotion just increase your contribution to your retirement account. Or allocate more money to go to your high yield savings account every week.
This has been one of the best ways that I have found to increase my savings rate.
Pay Yourself First!!!
The absolute best way that I have found to increase my savings rate is to always pay myself first. By paying myself first, it allows me to already have that savings taken from my check before I even get paid every week.
I remember hearing Robert Kiyosaki saying that it is ridiculous to trade 40 hours of your life every week and to have nothing to show for it.
So it is very important to always pay yourself first!!!
What Are Some Ways To Pay Yourself First?
To start with we will discuss some very common ways that people pay themselves first.
Do you currently contribute to a retirement account like a 401k? If so, then congratulations you are already paying yourself first. This is one of the simplest ways that people use to pay themselves first.
Another popular pretax way is to contribute to a Healthcare Savings Account (HSA). Utilizing these 2 ways you are actually paying yourself first even before you pay Uncle Sam.
Now there are a lot of ways that you can pay yourself first so I will mention a couple more ways that I use.
First, I work for a very large company that offers an Employee Stock Purchase Plan. Since there are advantages to participating in this program, I contribute money to it every week. Since the company pays dividends it allows me to not only by the stock at a discount but it also allows the money to compound, through dividend reinvestment, over time.
Next, I utilize the direct deposit feature when receiving my paycheck but before any money goes into my checking account I automatically have some money redirected into my High Yield Savings Account. By doing this it provides me with a more liquid form of savings where I can use that cash if I need or I can choose to invest it in some not so liquid investment vehicles.
Saving Is Never A Bad Thing!
In conclusion, saving is never a bad thing! I don’t care what the reason is. If its a new car, an emergency fund or for retirement, you can never go wrong by saving.
The best practice is to always start out by saving a little and then increasing your savings rate over time. As you earn more money don’t let lifestyle inflation creep into your life. Always try to utilize the practice of paying yourself first because it is a very effective way of increasing your savings rate.
As you increase your savings rate overtime you will find that it only helps you increase your earnings and gets you to financial independence that much faster!
As always I look forward to reading all of your comments and questions, until then….. happy investing!
-Jason from MoreDividends.com
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