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You’re terrible at saving. It’s not entirely your fault really.
Society has ingrained this consumerism into our minds so I can’t really blame anyone that falls into it.
You could cut back your expenses, but who wants to live like a hermit anyhow? Of course, you want a decent standard of living.
It’s a good thing this one trick will help you build long-term wealth AND maintain your current standard of living.
Really, if you boil it all down, all financial advice is just a variation of one thing – save a larger percent of your income. Some suggestions include earning some side money, but most suggest living modest lifestyles, avoiding unnecessary expenses, and saving more and more of your income. The more you save and the less you spend then the better you will be in the future.
Unfortunately, few people can even save 10% of their earnings, never mind 15 or 20%. I’ve even seen some set goals as high as 50%. These goals are great and you would be far closer to retirement if you reach them but too bad you are stuck paying five thousand different things and your check on Friday is already spent before you even got it.
So, YES you should be saving, and YES you should be saving more. You should also cut back your expenses so that you are saving a good chunk of your paycheck every month and investing in it good solid investments that yield a great passive cash-flow return in the long run (no CD’s or savings accounts in my opinion).
Most people will earn more money next year than they earn this year. If you save 15% of your wages, then next year you will have more money to spend and you aren’t actually saving much more.
Let’s say you earn $4k each month and you’re saving 15% which is $600 then get a 3% raise so now you’re earning $4,120 and saving $618. So you got a $120 raise but you are only saving $18 extra. Following this guidance means you will now spend $102 more. Let’s throw this idea right out the window. Our goal is to save more, invest more, and retire early. Why are we spending so much more?
Once you are actually saving a decent percent of your check, how do you continuously increase that number WITHOUT cutting back?
Half of Increase
You need to bend the cost curve.
“What the heck does that mean?”
As I mentioned above, saving a fixed percent of your income just leads you to spend more money every year. Instead, you should save a minimum of HALF of your pay increase. In the example above, save $60 per month and take that other $60 for your personal spending.
Now of course, if you could save all of it, great. I’m only counting half because some of your pay increase should go to offset natural inflation. Plus, who wants to live a stagnant life?
Look at the chart to the right. You’ll see that if you save half of your pay raise, the percent of your wages you are saving grows every year. After 10 pay raises, you are now saving over 23% of your income.
You are saving more of your money and still have extra money to spend!
Let’s say each year you can cut your expenses by just 1%. With a wage of $4000 and savings at $600, that is only $34 a month you need to cut. If every year you cut an extra 1% you can see how saving your raise and reducing your costs can stack up.
After 10 years you are saving 30% of your total income!
With this trick, you are able to save a larger and larger percent of your income without actually cutting your lifestyle at all. If you add in even modest lifestyle cutbacks, you can seriously stack the savings and quickly achieve your huge investment goals.
And honestly, none of this even takes into account that you will be investing your savings into good opportunities to generate passive income.
Eric is an investor that achieved financial independence at the age of 30. He started in 2009 with the purchase of his first triplex and now owns over 470 units. He spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate. Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, and other financial publications.
I started out as a full-time student, over $60,000 in debt, and didn't even have a full-time job (two part-time jobs).
Learn the system I used to create a 6-figure passive income.
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