Alright, what is it about savings that make this skill so powerful and essential to building wealth?
Savings is a process and requires discipline, repetitive action, and patience. Simple and straight forward, yet only few people do it. Why, you ask? I don’t know. It could be a number of reasons, but I do know they lack at least one of the requirements.
I have always said, it is what you do that counts. Discipline is no exception. It requires the willingness to change and developing a new mindset. You have to stay focused despite all the noise and distractions around you.
Repetitive action, aka, consistency is another key ingredient to savings. You must stick with your new habit and do it over and over again until it becomes second nature.
For bamboo to grow, research shows it takes a full five years for you to even see the buds sprouting. That means you have to be patient and consistent with your nourishment process for five years.
Now imagine, you’re taking care of the bamboo for five years, without seeing any signs of progress. You have no idea if what you are doing is going to be successful or unsuccessful. All the while, the roots are growing underground laying the foundation to support it’s growth. Five years later, you realize that all your effort has finally paid off. Growth, requires patience, a tremendous amount of patience.
What Do The FIRE Experts Say About Savings
You are in full control over your behavior and actions, therefore you have no excuse not to save, period!
Income does not matter and if you think it does, read what Vicki Robin and George S. Clason have to say.
MMM argues if you save 0% of your hard earned income you are never going to retire but if you save 100% of your hard earned income you can retire right now. Crunch the numbers and see it for yourself.
Remember, the FIRE community has done a tremendous job in providing a detailed level analysis on anything and everything related to financial independence and early retirement. I consider the entire FIRE community a very credible resource.
These are ordinary individuals, like you and me, who have succeeded in becoming financial free at least 20 or 30 years before the traditional retirement age of 59 1/2. There is no secret to their method, they adopted the frugal mentality, saved, and invested the surplus. And kept repeating the process until they crossed the financial freedom line.
Perhaps you want to be financially independent and don’t plan to retire anytime soon. That’s fine, financial independence requires substantial savings rate too.
If you want to know how they did it, check out the resources page and open your mind to a new way of learning.
How We Go About Savings
It has never been easy for us to save money, however we have made great progress and quite a few changes in order to improve our savings rate.
The reason it was hard in the beginning, was because we only got to save a little bit and we started thinking that we can’t save because we don’t have enough to save. We needed to make more money if we wanted to save, so we pretty much thought the same way the common citizen thinks about savings.
How can I save when I don’t have enough to save? Well, that though process is the start and end of everyones’ savings adventure. You can’t think like that and expect to accumulate a stash of cash, not now, not ever.
Years ago we made personal decision to save more of our income. At that time, our decision was not based on achieving financial independence or early retirement but rather have enough money saved for unplanned things that happen in our lives.
Around 2006 on combined income of a little over $85,000, we started tucking away 10% of our income. In 2013, on a single income of $70,000, I started looking for ways to increase our monthly savings rate with pre and post tax dollars. Because I was a full time employee I contributed to my retirement account (e.g. Roth 401k), health savings account (e.g. HSA), and employee stock purchase plan (e.g. ESPP). Additionally, I made contributions to my wife and kids Roth IRA’s.
Here is what I did:
- Maxed contribution to the HSA
- Maxed contribution to the ESPP
- Maxing contribution to the Roth 401k
- Maxed contribution to mine and hers Roth IRA
- Maxing contribution to the kids Roth IRA
Fast forward to present day and our current savings rate looks like this:
The numbers above are calculated as percentage of my total before and after tax income that goes to these accounts. The HSA percentage is based on before tax income, where as ESPP, Roth 401k, and Roth IRA’s percentages are based on after tax income.
Looking at our overall savings picture, we are saving 60% of our monthly income. According to MMM analysis, it is going to take us 12.5 years to retire.
Our Philosophy
For us, it started with saving 10% of our income. As time went by, we learned new ways to save, and as a result, the savings rate increased. In order to save, our approach to spending had to change.
We started with small things, like cutting down how much money we allocate on each category–gas, food, and public transportation, just to name a few. For instance, to fill up the gas tank used to cost $65. By deciding to put only $30 worth of gas, we saved $35 on gas. Which meant, we can either allocate that money towards a different category or simply save it.
Same principle applied to grocery shopping, instead of going to Safeway or Giant we decided to go to Aldi and Costco and cut our monthly grocery bill from $1100 to approximately $600. Plus we ended up buying fewer items, which helped lowering our grocery bill even further.
I used to put the maximum allowed amount of $250 on my metro card every month and let the money sit in the account, even if I didn’t ride the metro. Some days I work remote, other days I’m on PTO, since the money is already on the card I can’t do anything with that money except ride the metro. By deciding to put enough money to get me to and from work on weekly basis I was able to free up some extra cash and allocate it to a different category or simply save it.
By following the process of spending just enough, we found ourselves with plenty of leftover money each month. The key is to invest the savings otherwise, even though you save on gas or food, if you don’t invest that money and you spend it elsewhere, you are not saving.
The saving strategy discussed here, allows us to save first and then spend. The reason behind it is simple; every dollar we earn is automatically deposited in an investment account before we even get a chance to spend it.
I do realize that everyone situation is different and you can’t cut down on certain things. At least identify what categories you can apply this process to and do it. It worked for us and I’m certain it will work for you too.
The point I’m trying to make, is that once you spend your money, you can’t get it back. That money is gone forever.
To sum it up:
- Never spend 100% of your income
- Start investing at least 10%-20% of your income
- Say no to items you want and focus on items you need
- Be consistent
- Be frugal
- Repeat
Looking Forward
I plan to increase contributions to my Roth 401k until it is maxed out. It is going to be a gradual process because I have ideas about creating passive income and will be needing all the cash I can get my hands on.
Same goes for the kids’ Roth IRA’s. The kids each earn an annual income of $588. I can’t contribute and invest more than $588 annually according to IRS regulations. However, I can increase their contributions and keep the surplus in the money market account to grow tax free.
The beauty of earning less than $600 annually is that you don’t have to pay taxes and you don’t have to report your earnings. Since the kids can’t file their own taxes yet, I report their earnings on my 1040 form anyways.
Keep in mind the ITA information above are based on the information I provided for my kids’ earnings. Your results are most likely going to be different based on your answers to the questions.
To find out if you are required or not required to file a tax return, check out the IRS interactive tax assistant (ITA) here.
Increased contributions to the kids’ Roth IRA’s are going to happen in one of the two ways.
- Salary increase
- Gift
If their salaries increase, they can contribute and invest more to their Roth IRA. The goal is to keep the earned income low enough not to trigger a taxable event.
IRS gift tax changes every year. The limit for 2019 is set to $15,000, which means I can give each of our kids $15,000 to put in their Roth IRA money market account.
On the flip side, since the kids did not earn that income, the $15,000 can’t be invested, but it can remain in their money market account earning tax free interest.
The Brokerage IRA is most likely going to be the last account we contribute to simply because I want to max out the other accounts first. There is no limit as to how much money you can contribute and invest to the brokerage IRA. All leftover savings are going to get redirected to this account.
Keep in mind, the contributions to the brokerage IRA’s aren’t taxable, but the earnings are.
To sum it up, here is what I plan on doing:
- Max contribution to the Roth 401k
- Max Kids’ Roth IRA’s
- Future contributions to Brokerage IRA
Now that we have a strategy in place that is set on autopilot, I have some time to reflect on what it took for us to get started. However I go about trying to figure this one out, it all boiled down to mental preparation, over anything else. We simply changed our way of thinking about savings and money.
Even though we had numerous conversations about saving money with family, friends, and co-workers; that did not do anything for us, in terms of getting started. It was educational and a great topic of discussion over dinner.
Talking doesn’t do much if you don’t take any action. So we took action to get started and come up with a strategy to save and save some more and keep saving.
Closing Thoughts
Obviously each person’s situation is unique, so you should do your own due diligence before making any changes to your contributions or savings rate.
Enjoying the fruits of your labor can take a lot of time, and if you want large stash in your bank account, it could take years. Fortune favors the patient as luck favors the prepared; it always has and it always will. Being disciplined and watching your spending can make a huge difference in attaining your goal to accumulate wealth. Stay the course and ignore the noise around you.
I believe your saving’s rate is the most important step towards starting your financial independence journey. It could shave decades off your working career.
To stay enthusiastic about savings and everything else in life, we are constantly looking for ways to improve our strategy and skills. We are educating ourselves of new ways we can save and make money, day in and day out.
One of our goals for this year is to attend FinCon, which happens to be in Washington, DC. I’m pretty sure we are going to learn a great deal of tips and tricks that are going to keep us excited about saving.
Share your saving strategy with us and tell us about the lessons learned and the challenges you have encountered.
Remember you are always in total control of your behavior and actions, so get excited and stay excited!
We are rooting for you!
