You should save if you don’t want to be reliant on an employer or the government to support you. For those like myself that love what they do for a living, I still don’t want to have to work. At InSight, we call this employment dependency. How long are you dependent on an employer to live and at what point can you stop working and live off your income from your investments? For those that don’t like what they do or aren’t thrilled about it, you probably don’t want to have to work more than you have to.
Well “have to” depends on what type of lifestyle you want to live. If you don’t want money to be a concern later in life then you should start saving now. If you’re able to live a frugal lifestyle you should still be saving just not as long as others that want more income. Keep in mind that a dollar today is not worth the same as a dollar in 30 years so you need to know how inflation affects your plan.
My advice to those that want to be financially independent is to follow these steps:
Step 1: Save at minimum 15% of your pretax income with a goal of 20% – 30%
- What about my living expenses? Outside of a few key expenses also called non-discretionary expenses (rent/mortgage, utilities, groceries) your formula should be “Income – SAVINGS = Expenses”
Step 2: Automate your savings
- You love automating things like your Netflix subscription so why not automate your savings? Just like your 401(k), save anything you can into an investment account
- Log into your payroll system with your employer and go to the section where you put in your bank account. Add an account and make it an investment account. A simple brokerage account (i.e. Wealthfront, Vanguard, Betterment, etc) will do.
- For every paycheck take a fixed dollar amount or % and have it automatically deposited into your investment account. No matter how small the amount, create the savings habit now. Notice I didn’t save checking/savings accounts. Outside of your emergency fund (3-6 months of fixed expenses) every dollar needs to be working for you and making you money.
Step 3: Don’t touch it and barely look at it.
- Don’t link your bank account to it. Don’t download an app on your phone to look at it. Don’t think about it. The firms I listed (there are a lot of them) and InSight automate your investments and put them to work right away.
How much does saving $50 bi-weekly turn into after 10 years at 8% return? $79,676
What about $250 bi-weekly for 10 years at 8%? $398,384