Consideration #1 in Deciding How Much to Save — The Less You Save, the Longer It Takes.
At some point in your life you need to have enough saved not to need to work anymore. It’s obviously better to get there sooner rather than later. Saving more gets you there sooner.
This is a painfully obvious point. I mention it, though, because my sense is that many people never think through the implications of their decision to take the slower route to financial freedom. Some say “I don’t like to save.” Fine. But you are not avoiding the reality of needing to save enough to provide you financial independence by taking the slow route. Those who save little need to save just as much as those saving much. It just takes them longer to get to the end point of the journey.
Those who say they don’t like saving spend a greater part of their lives saving than do those who say they do like saving. Make sense? No, this does not entirely make sense.
If you really do not like saving, you should save a lot and put the job behind you as early in life as possible. If you begin working at age 20 and win financial freedom at age 45, you spend 25 years saving. If you begin working at age 20 and win financial freedom at age 70, you spend 50 years saving.
Consideration #2 in Deciding How Much to Save — Telescoping the Process Reduces the Amount of Saving That You Must Do.
Only a portion of the money that finances your financial freedom will come from money you earn at your job. A good bit will come from earnings on your savings — that is, your investment returns.
It’s preferable to have your money do as much of the work as possible and for you to do as little of it as possible. By increasing your saving percentage, you place more of the burden on your money and relieve yourself of much of the effort of financing your financial freedom plan.
Those who save 30 percent of their incomes not only complete the saving project far sooner than do those who save 10 percent. They shift much of the burden of financing their financial freedom to the money they save. Saving generates saving. Save more and you end up needing to save less.
Consideration #3 in Deciding How Much to Save — Saving More Opens Up Opportunities to Earn More.
The New Economy is an Opportunity Economy. The middle-class worker has never been at as much risk of falling out of the middle-class. The other side of the story is that the middle-class worker has never possessed so many opportunities to rise out of the struggling middle-class into the ranks of the truly wealthy.
It’s those with money in the bank who are best positioned to make the jump. You will probably at some point in your life have a chance to be part of a start-up enterprise that could make you a millionaire. You will probably at some point in your life have a chance to make a career shift that would require a short-term pay cut in exchange for a long-term chance of a big pay increase. If you don’t have money in the bank, you won’t be able to take advantage of those sorts of opportunities. If you do, you will.
Consideration #4 in Deciding How Much to Save — 10 Percent Is the Most Boring Saving Percentage.
The conventional advice is to aim to save 10 percent. Why 10 percent? It’s a number that people came up with when they tried to determine how much you would need to save to be able to retire at age 65. Saving 10 percent just barely gets you to where you need to be at the stage of your life when you are running out of energy to continue at your job at the same level of intensity.
What you are really doing when you save 10 percent is financing a fund that will be used to cover your costs of living when the machinery of You, Inc., (your body) is no longer able to do the job. Even when that sort of saving plan works, it does not provide much in the way of the exciting kind of financial freedom. It frees you of the need to work in your old age, and that’s of course a good thing. But your life options are limited at age 65. The more expansive form of financial freedom goes to those who use saving to enhance their life options at earlier ages.
The end-result of saving 10 percent is none too exciting. Most of us don’t even want to think too much about the day when we turn old and gray, much less give up benefits of spending to provide financing for it. The lack of excitement we feel about the conventional saving goal is a big part of the explanation of why the national savings rate is so low.
Saving 20 percent is more exciting. Half of your saving effort is directed to the boring saving goal when you save 20 percent and the other half is directed to opening up opportunities to do some very exciting things with your life. At 30 percent, saving becomes even more of a thrill.
It is not three times as hard to save 30 percent as it is to save 10 percent. In some cases, it’s easier. Saving 30 percent can be more fun than saving 10 percent because the Life Goals that can be attained by saving 30 percent generate so much more in the way of motivation.
Consideration #5 in Deciding How Much to Save — The Value Proposition for Spending is Sometimes Too Compelling to Justify Much Saving.
Conventional money advisers harp on the benefit of compounding returns earned by those who save young. There really is a bit of magic associated with the compounding returns phenomenon. Considered in isolation, the idea of saving young makes all the sense in the world.
Your decision as to how much to save should never be made in isolation, however. Effective money management is an exercise in making comparisons between the value propositions offered by spending and the value propositions offered by saving. It’s not just saving that provides compounding returns to the young. Spending does too.
A trip to Europe provides more lifelong educational benefits to a 30-year-old than it does to a 60-year-old. Buying exercise equipment provides more lifetime benefits to a 30-year-old than to a 60-year-old. Buying a personal computer provides more lifetime benefits to a 30-year-old than to a 60-year-old.
Saving is often a great money choice. Spending is often a great money choice. Don’t get so caught up in your enthusiasm for saving large percentages of your income that you take a pass on wonderful value propositions being offered to you by spending.
Consideration #6 in Deciding How Much to Save — Rebels Save.
One day I was waiting for a meeting to begin at my corporate job and they started playing “Taking Care of Business” to set the mood. The Establishment Machine co-opted rock and roll. It doesn’t make you too much of a rebel anymore to like songs with a strong backbeat.
What does make you a rebel? Gaining control over your future. Future rebellions will come from those who have walked the path to plentiful free time and soul-satisfying work.
It’s not really butterflies that are free. It’s effective savers.