It’s got to ruffle your feathers, doesn’t it? Those people who say that saving money isn’t how you get rich; how to retire early. “No one ever got rich by saving money”, they say.
How dare they. After all, saving money is what we personal finance and early retirement bloggers write so much about. We fill the digital airwaves with wickedly creative “hacks” to save a buck or two with virtually everything we do. Like going out to eat. Or shopping in bulk. Or refusing warranties.
The act of saving money won’t, in and of itself, make anyone rich.
Surely, saving money has something to do with getting rich, right? If not, why would so many of us talk about this stuff so much? There has got to be something meaningful to saving some cash, right? Kinda. But, it might not be in the way you think.
Saving money has little to do with getting rich
It’s true. The act of saving money won’t, in and of itself, make anyone rich. Ordering water instead of soda or beer at restaurants might save you a few hundred over the course of a year. But let’s face it: A few hundred isn’t life-changing money. Those extra benjamins have no business convincing you to hang up your hat in corporate America. If ordering water was the easy button to achieving early retirement, we’d all be retired early and sipping margaritas in paradise.
Sadly, compound interest doesn’t materialize out of thin air.
Early retirement is enabled by household wealth. How much money you have, rather than how much you save. That’s the delicious gravy that, when smothered over a stack of steaming hot mashed potatoes, makes the meal.
You know what I’m talking about…buttery taters lovingly mashed into creamy perfection, sprinkled with a little salt and a pinch of pepper.
Saving is not the magic sauce to early retirement. There is nothing wrong with it, though!
It is true that saving money does not lead to wealth. That said, there’s nothing wrong with saving some cash by changing up your spending habits you developed over the years that probably resulted in wholesale hemorrhaging of your precious greenbacks from your wallet. Don’t get me wrong, saving money is great. It’s wonderful. It all helps.
It’s just not the magic sauce to early retirement.
Wealth comes from a very different source: Investments. Here, take a look at a pretty graph that puts in chart form what little effect saving money has over your household wealth. I warn you, however, that there are a bunch of sleep-inducing financial buzzwords that permeate that post. You know, things like “market revaluation” and “consumer durable investments”.
It’s not about how much money we have. Wealth is a direct byproduct of what we do with that money. It’s THIS that enables early retirement.
Keep your savings in a Ziplock baggy under your mattress and you won’t prepare yourself for anything beyond the apocalypse. And even then, I doubt your local merchant will be around anyway to accept your cash for a loaf of bread because their credit card processing machine was destroyed in the nuclear blast that annihilated most of humanity.
Come on, now. Let’s be real.
Where saving money helps early retirement
Since this is a blog about financial independence and early retirement, naturally, I need to support the idea of saving money. While it’s true that saving money alone won’t do a damn thing to enable a blissful destruction of your alarm clock – Office Space-style, for the rest of your life, it’s flat wrong to plainly state that saving money has nothing to do with it.
I like to think the equation that solves the early retirement riddle is actually quite simple: Your money’s purpose + Your motivation = Your chances at giving corporate [Insert Your Country Here] the middle finger.
Invested money has a purpose.
Let’s say you have all the motivation in the world to call it quits. Alright, you have one element of the equation firmly in hand. You want out, and bad.
The other element revolves around your money’s purpose. In other words, is your money working for you or are you working for it? If the former, you’re in good shape. If the latter, you’ll probably celebrate your 60th birthday sitting in an office building somewhere.
Invested money has a purpose, and the more money that you have to invest, the easier this equation becomes. And, the quicker you’ll be sipping a Sex On The Beach while…having sex on the beach? Okay, at least sitting on it.
I’ve burned through a hundred additional words to basically say this: Invest your savings. Simply “not spending it” isn’t enough. That dough you saved by ordering water in restaurants instead of your Coke or Pepsi? Don’t just “not spend it”. Invest that shit. Get that cash in the market and let it work for you. Let compound interest work its course like it has for so many of us who enjoy life outside of the confines of a full-time job.
It works, guys. Trust me, it really, really works.
It doesn’t matter how much you earn or save
People get rich in a variety of different ways. Unless you won the lottery or inherited a crap-ton of money, you’re probably in the same bloated boat as the large majority of people in first world countries. You’re fighting for your life, every day. You go to work and earn a living. You provide for your famiy. You try to have as much fun as you can along the way. Sometimes, it works.
Congrats, you’re just like 98% of the people in your country.
The nice thing is you don’t need to be the most frugal person on your block. You don’t have to start and sell a company for millions of dollars. Hell, you can even order a Pepsi at restaurants every time you go – if that’s what makes you happy. None of that shit matters as much as one very simple, yet profoundly important, question:
What is your money’s purpose?
How to give your money purpose
Alright, here we go. It’s the money shot of this blog post – if giving your money purpose is the key to early retirement, how does this happen?
Know where your money is going – You can’t begin to un-screw your financial situation until you realize where your money is going. Budgets can help, but frankly, your bank statement is all you really need to determine where your money is going and, importantly, whether your spending is setting you up to meet, or fail, at your financial goals.
Show me a man’s bank statement, and I’ll tell you what he values.
For example, those damn automated monthly payments for services that you may no longer use are killers. They were for us. Because you don’t have to lift a finger to make those payments, you quickly forget that you’re making them. Bank statements help. Just look at ’em. Can you justify it all?
Give a shit about your future – More critical than most people realize, you need to care about what happens to your future self. Yes, we all want to be “successful”, but what does that mean? Do you actively want to retire early, or are you content with working through the traditional lifespan of a typical worker in our society? In 20 years, do you see yourself living in the same house? Working the same job? Driving the same car? What will change?
For the record, it’s okay if you have no interest in retiring early. But, knowing exactly what you want out of life – whatever that happens to be – will guide your money’s purpose.
Invest – If your company matches 401k contributions, at least contribute that amount. Remember, 401ks are pre-tax money, which means not only is your company shoveling you cold hard cash, but you’re lowering your tax burden by a dollar-for-dollar contribution into your 401k account.
Brokerage accounts work, too. We like Targeted Retirement investment accounts and have heavily utilized their automatic diversification strategy so we don’t have to worry about all that. Seriously, we just throw money into our brokerage account and literally forget it. There’s no secret sauce to getting rich in the market. Besides time. You gotta give it time.
Persistence – Early retirement is easy, but it’s not quick. It takes time, just like most goals worth striving toward. Avoid the rookie mistake of expecting 20% capital gains in the first year of investing your dough. It doesn’t happen that way, even in today’s outrageously lucrative market.
Your life’s purpose takes time, just like your money’s. Don’t expect miracles with your money. Reality doesn’t work that way. Budget and invest. Then, stick with it. I mean stick the hell with it. Keep throwing those greenbacks into your investment accounts. Month after month. Year after year.
That persistence adds up into mountains of cold hard retirement cash.
Where do you stand on this topic? Do you agree with the phrase “nobody ever got rich by saving money”?