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?
If I were rational I should focus alot more on raising my income and less time on investments. My job as a mailman dont give much income (hopefully I will find a job more suitable for my education and interests in the future). Luckily im very good at limiting expenditure. Out of that low incomestream I can usually save about 50%.
Jobsearching can be frustrating as you arent in control. Investing is a way for me to increase control my lifesituation and even without a new job raise my income over time.
One tip for saving expenditure is to multiply small expenses to get the sum of the month or the year. When i take the bike to work instead of bus I save about 4 usd. That might not seem worth it but thats 1000 usd in a year. The same goes for bringing my homemade food instead of lunching out.
Dividends For The Long Run
I approach purchases in a similar fashion but haven’t quantified it before in terms of the 10% rule. When I finally got around to cancelling a couple of subscriptions to some investing newsletters the rationale was that the cash I was paying for their information would have been better applied toward investments and utilizing free investing resources instead. Down the road that would provide me with appreciating assets as opposed to a money sink.
What type of education do you have, out of curiosity?
As for the point about multiplying costs out for the whole year, that’s a great point and I do that as well.
Great stuff. As you can probably figure, this kind of article is right up my alley.
I’ve never thought about the 10% rule. And yes, although a $15 ice cream cone sounds expensive…as you put it life is short and you only go around once. It doesn’t matter how large your portfolio is when you’re taking your last breaths. You can’t take it with you.
Good ideas on raising income. I see some bloggers making quite a bit of money online, and although I haven’t experienced any of that personally, it’s something I do out of the love for it…much like yourself. I agree that a second source of income, especially if the intent is to sock away the excess income as a means to increase your savings rate, should be something you enjoy, and you should focus less on exactly how much money you can make from it. The money will follow later, I believe.
Great article to think on as we begin the weekend.
I’ve found that it is much easier to make money and then invest it (for a decent rate of return as you said) than it is to make money through investing, if that makes any sense. For example: If you had a limited amount of time it probably does not make sense to spend a lot of time researching investing strategies when that time could be spent finding a higher paying job or income stream.
As far as being frugal I’ve never been the type of person where advertising had much effect on me. When I do buy things I just try to get the best quality product at the best price. Thinking about the value of something now compared to the value at retirement is too much for me. In theory it is correct, but what if you don’t even make it to retirement for some reason, then you could have enjoyed yourself but didn’t. Living below your means, but spending a bit without too much worry is kind of like an insurance policy against that regret.
I really appreciate your blog and the stock analysis that you do BTW.
Interesting article, this is a perspective I hadn’t thought of before. I think second/part time jobs are going to become more normal for higher income earners than they are now, as a means of stockpiling money when you have a full time job in your chosen profession, and for survival when you don’t.
The other thing about having a second stream of income for investing, if you are out of a job or think you might be, the extra invested and extra income can really help.
I was never personally out of a job, but I had companies I worked for go bankrupt and being bought out. I was also through down-sizing (and right sizing) and that sort of thing. Having a pool of money can really lower your stress level when times are bad.
It is better to spend all of it now be it on gold, silver, oil, natural gas and purchase whatever makes you happy while the dollar still buys something. The country may be entering as Jim Rogers said an “inflationary holocaust” in that Ben Bernanke is hell bent on destroying the purchasing power of the dollar. Inflation, realistically, is at least 12% and will go far higher in 2012. See John Williams and shadowstats.com.
Since the Fed was created in 1913, the dollar lost more than 95% of its value and its mandate was to protect the value of the currency. So invest to protect your purchasing power and buy whatever makes you happy since it may later on be out of reach. Forever!