It’s not how much you make, it’s how much you save

Saving is about slow and steady, not the fast and the furious.  If you make a lot of money, but spend all of it, you’re not rich. You’re just a poor, high earner.  You can have a modest job, but as long as you save often and early, you’ll benefit in the end. There is a lot of financial advice out there. But some of us don’t want to live in a cardboard box or only have one child or live in an RV, or be landlords. Shouldn’t there be some middle ground?

I have three young boys and we just recently brought a Mastiff pup into the family (no, they are not cheap - the dog or the kids).  At one point we had 3 kids in full-time day care, with monthly daycare payments that were much more than our mortgage on a nice sized single family home. If we didn’t have kids, we’d have such a nice vacation house, with money to spare. And that’s just the savings on daycare! If you want more than one kid, you’re not retiring at 30, I’m sorry to say it, unless you literally save 50% of your income and don’t spend any of it. Having a large family is not conducive to early retirement, but it is conducive to learning how to save money on everyday things! I am not a handyman, but out of necessity I have learned how to fix things. I have learned how to save on everyday things like shopping, mapping out the most efficient routes, running all errands in the same time trip, taking hand me downs from friends/family/neighbors, and really looking at all mandatory spending as a potential savings opportunity. 

My wife has a friend whose child just started elementary school, and they immediately said, “Great, now what are we going to buy with all the extra money?” But I’m thinking about how I can put my money to work, how it can be invested, our retirement plans, tax advantaged savings, putting more towards the principal of our house, more towards a 529 plan. Essentially I think, “How can I retire earlier?” When someone pulls around the corner with a brand new car that they didn’t need I think, “That just cost you an extra two years of working!” 

People also put off saving until later in life when they “make more money.”  Or they get nervous about the stock market or how to invest their money.  I know lots of very smart people, but most of them have no clue about retirement or savings, how much they will need, when they want to retire, how to invest, etc.  In the United States, there is very little retirement training; maybe a two-minute intro to your retirement plan at your orientation. But unless you seek out a financial consultant, there is no advice about how much you should be putting in, charts about how if you save 15% of your salary each year, that retirement should be easy. Most of my peers don’t even know what a Roth IRA is!

When most of us start our first job, we aren’t exactly well off. Like a rookie to the NFL, I get the need to want to blow your first paycheck on the stuff that you’ve been deprived of the previous four years.  Enough eating Ramen twice/day, it’s time for steak! I have seen so many brand new cars get purchased each month by brand new employees. Most of this is due to advertising; the need for consumers to buy more stuff that they don’t need and it getting pushed on us by big companies trying to squeeze our last buck out of us. That feeds into the peer pressure as well from others who get the latest and greatest.  Buy more on credit, no problem, we’ve got you covered, you can afford it, you can buy a house that costs you 50% of your take home salary, you’ve got credit cards for the rest. Well this is how the trap starts, by buying the car you can’t afford, eating out three meals a day, buying coffee that is more expensive than a lifelong smoking habit, but eating meals out twice/day and then going out for drinks.  For those expensive vacations when you get a week off of work.  All of those things are short term highs that really don’t make you feel much better at the end of the day. Vacation is great, I love time off, but when you work yourself to the bone in order to take a vacation in order to unwind because you’ve been working so much…  Then rinse and repeat since you have to pay off that vacation you just put on your low interest 20% credit card.  Guess what, you’d get better rates from your local loan shark…  20% is not low interest, it’s a mugging, but it’s part of the new norm where we live paycheck to paycheck, spend what we have on cool stuff and sort out the debt later.

Then of course when you get older and your salary goes up you start to have that lifestyle creep.  So the Corolla you bought when you were out of college is no longer good enough, you need that full size pickup truck with the 2^nd row and leather seats for those imaginary things you need to haul.  I admit it, you look manly throwing that suitcase into the back of your luxury pickup truck, but it’s not worth the price you have to pay for it.  Most people spend what they have based on what they make (or even more by putting it on credit cards), and then the remaining amount they save for retirement.  It should be the other way around though, you should be figuring out what you need to save first based on long term goals/purchases (like a house) and retirement (I want to retire no later than 55 so I need to save X amount each year).  At that point you have your long term goals set and have a plan. If you want to change it later, then great you can adjust and save less or more, but at least you have a general plan.

If everyone had a plan, then there wouldn’t be this debt and savings crisis.  It’s really not rocket science, you can literally google “retirement calculator” and have a general idea of how much you need to save each month based on an 8% historical stock market increase. But more people spend their time on Facebook.  If everyone took 1/10^th of the time they spend on Facebook during one day of the year to plan out their retirement then they would be better off than 99% of the country. That’s like one hour a year. 

Most companies offer a handful of mutual funds to invest in, most have some sort of S&P 500 type fund and if you don’t have a company retirement plan then Fidelity and Vanguard offer very good, low fee funds.  All it takes is the mindset to pay yourself first and put money in retirement from the start of your career to the end.  If you plan to retire someday comfortably and not have to move back in with your kids, then take a few minutes/year to look at a retirement calculator to see what you think you’ll need to save each month to get to your goal based on your retirement date.  If you don’t know how much you need, then there are calculators for that as well, but start early and save often.  If you can re-baseline yourself to your “new salary” then things get a lot easier, and you can worry about other savings after that.  The biggest deal in saving for retirement though is starting early and letting time do the hard work.  You can have a modest salary against a high earning salary but your $18k/year in 401k is the exact same amount as a doctor or lawyer saving $18k/year. In my opinion, though, the modest salary has a better advantage for a number of reasons: 1) the modest salary is used to living on a lower salary, 2) the modest salary probably has a lot less debt (i.e., student loans), 3) the high salary has to live up to their title and status (how many doctors or lawyers do you see driving a Corolla?), and 4) come retirement, the modest salary can live on a lot less. A high spender isn’t going to drastically reduce their spending after retirement. Plus, it’s a lot easier to replace a salary of $50k/year than $500k/year.

Start early, save often, and let time do the rest!