Its funny, everyone wants to be rich but nobody wants to save. Its like everyone thinks they can live the life while they are young, and then a pot of gold producing 10% free cash flow per year will be waiting for them years later! Unfortunately, that is not how it works folks. In order to start getting rich, you need to be thinking of the your finances constantly. As we will describe, savings alone will not make you anywhere close to rich. However, they are a first essential to building wealth.
Start. START. START!
Interestingly enough, people always ask me, what is the first step, how do I even get started saving? This drives me crazy! You just start! But then I also realize that for some who are working, their monthly paycheck leaves them with nothing at the end of each month in savings, which does make it literally impossible to save, so I see the concern. This leads me to my next point.
You can’t just plan. You need to plan EXACTLY.
If you are in the middle of the grind right now, and you realize that your income minus your expenses leaves you with no cash at the end of the month, do not be ashamed, but do understand that this is not OKAY, and not WORTH IT. If you are just making a living like this, then are there is no goal and you’re stuck in a cycle.
The real issue is that most people are not even at this realization. They work and spend and work and spend with no thought to their finances whatsoever. So realizing that this is a problem is the first important step.
Next, here’s what needs to be done in order to SAVE REAL MONEY. Lets get started, it is quite simple actually. First, look at your current AFTER TAX income. Lets say you bring in $3,000 per month after taxes per month. How do you find this? Well you can calculate your tax rate and deduct it from your gross income (listed on your work contract), but that can be complex as you need to look at federal local and potentially city tax rates. However, you can also simply look at the amount your company deposits into your bank account each month (usually twice per month).
Then let’s calculate our current expenses. Let’s say you spend $1,800 per month in cash. Now, take a look at ALL your expenses to calculate this. To name some big ones; rent, food, loans (student loans, car loans), gas expense, utilities, “enjoyment” expenses, healthcare costs, and other random costs that may come up. Make sure it is accurate and conservative.
In this example, we are left with $1,200 at the end of the month. How do you keep track of this? Well, you should have the exact amounts that you need for savings and spending deposited into individual accounts. So, once you have determined that your expenses are roughly $1,800, you should have that much deposited into a checking account, and the remainder of $1,200 will automatically be deposited into a savings account.
In this example, you would automatically save $14,400 per year and in just 3 years, assuming no investing (we’ll get to that below), you would save $43,200! At that point, you would feel pretty comfortable as your savings can pay for any emergency expenses (losing your income, or healthcare expenses)
Don’t Save. Save and INVEST.
Now as a very important point, we want to note that it is very difficult to accumulate a lot of wealth if you are not INVESTING your savings. This is due to two reasons; one is inflation. (Basically, if prices rise, your money will buy less, so it will be worth less in reality even if you have the same amount saved). Two, investing uses compound interest to build on your investments in an exponential fashion. Bottom line, it makes no sense to not invest your savings. For a primer on that topic, we definitely have an article on this website. (Scan through our amazing topics to find it!)
Small steps followed by large steps
Note that this will take time, and your steps should compound over time. This should be due to an increase in your income. Its very important to know that saving along will never make you rich, you need to focus on saving at first to make it a habit, but then your full energy should be spent finding ways to grow your income. Can you find a way to make $1,000,000 in one year? It will be IMPOSSIBLE not to save if you do that, so that is the real question. Good luck!
Check out these highly recommended books to start saving and building wealth. Enjoy!
How to Get Rich: One of the World’s Greatest Entrepreneurs Shares His Secrets