Of course the math is simple- if you want to build wealth, there are only two main ingredients.
1) Make more money than you spend, and save the difference.
2) Get a decent rate of return on your savings.
Most of this blog focuses on step 2. For step 1 which I touch on only from time to time, I largely avoid the topic of income, as that’s something that is closely tied to one’s profession. When it comes to step 1, I instead focus a few articles on limiting expenses. Mostly it’s pretty simple advice- consume less. Less fossil fuels, fewer depreciating assets, fewer distractions. Weed out what is not important in order to focus on what you really do consider important. Rather than accepting a lower standard of living, it’s about realizing that by streamlining one’s life, less can be more. More time for people and things you enjoy, more space, more money, more freedom, less worry, less maintenance, and less clutter.
This specific post will quickly outline two ways to improve your savings rate. It’s not groundbreaking advice, but instead presents a few numbers to think of when making decisions.
One way to boost income is with a second job. Many people, when they get a profession, think of that as their only livelihood, and are content with working 40-50 hours per week. But it can be rewarding to have a second stream of income.
For me, that income is currently blogging and writing freelance investing articles. It doesn’t pull in a ton of money, but brings in several hundred dollars per month. And this isn’t income I have to think too much about- I undermonetize my site, rarely deal with advertisers, and instead just focus on content. I’ve even calculated the approximate hourly “wage” I receive from blogging, and while it’s not as high as my primary profession, it’s workable. But I wouldn’t work for this wage if I didn’t love what I did. It’s not high enough to make it worth it on money alone, and this blogging project was started with the expectation that money would be light, and that any money made wouldn’t be made for a rather long time (which was true). The important factor is that I enjoy what I do; I enjoy earning my second smaller stream of income as much as, if not more than, my primary income. I enjoy networking with other writers, getting positive emails, making some otherwise tricky concepts clear and approachable, growing my knowledge of the business world by looking through more and more companies, encountering interesting new investing situations, and so forth.
I know a retired engineer that spent most of his long career moonlighting as an emergency driver after work. There’s no way he put up with that for decades for a few extra bucks here and there. He did it because he loved it. He loved helping people, he loved being there, being involved, and was an outgoing people-person that loved getting to know the town like the back of his hand, and meeting new faces all the time.
When it comes to a second “job”, bringing in a second stream of income while doing something you like can be rewarding. It turns time that would be spent consuming, into time spent producing, building, or creating. Suppose that, after tax, a person brings in $60,000 per year, and spends $35,000 per year. That leaves $25,000 for saving. Now suppose that she finds a way to bring in $5,000 in extra net income that she really enjoys doing. That’s only an 8% increase for her total net income, but if her expenses stay the same, that’s a 20% increase in the amount she can save. If the side income is $10,000 instead, then it’s a 16% increase in income, but a 40% increase in savings. That’s the math to focus on- how much a potential income stream can increase your savings rate, not your income level.
One thing about me, is that I’m not particularly frugal. I’m minimal, but when I really want something that I think will provide value, I buy it. For me, one of the great things about saving and investing is that I don’t like to pinch pennies or think of money too often. Instead my approach is simply to buy so little nonsense, that when I want to spend resources on something, there’s really no issue.
I recommend the “10 rule” when it comes to buying things. This comes from the following scenario: if you get a rate of return of 10% on your money, and inflation is 3% per year, then the real rate of return is 7%. If you put a dollar away now, and it gets a 7% rate of return, it’ll turn into $10.68 in 35 years. In other words, every dollar you save today, is about $10 when you retire.
So for everything you want to buy, multiply the price by 10. That’s how much your future self is paying for it. If you still think it’s worth it, go for it. It puts things into perspective.
This could conceivably drive some people crazy. Maybe it’s a bit too much. Maybe it means that absolutely nothing looks like it’s worth buying, since nothing is worth 10x the face value. Ice cream cones aren’t worth $15, that drink in the club isn’t worth $100, a blue-ray disc isn’t worth $200, that great shirt isn’t worth $500, that concert ticket isn’t worth $700. Multiplying everything by ten makes everything look ridiculously expensive. It depends on your age, your situation etc. but sometimes, these things are worth it. You’re only young once, your kids are only young once, you only live this moment once, you only have these friends or this family for the limited time that you have them. So when it comes down to it, some things really are worth paying tenfold for. And the 10 rule can help filter out what you consider truly valuable in the present. I tend to find that usually, experiences are worth it, while material things are often not, unless those things are part of an experience with others.
So what are your thoughts? What helps you save money and live more intentionally and proactively?