The biggest question I tend to get from those seeking wealth is, “What’s the secret?” Sometimes I blurt out, “There is no secret, only hard work and discipline.” But if I were to provide them with something more tangible I would say, “Wealth is dictated and driven by savings.”
That’s right. Most people tend to think it is about earnings and big gains. Don’t get me wrong, those sure can expedite the process and help you reach your goals. But there are plenty of people that had big earnings or experienced big gains and still ended up dead broke (or certainly without lasting wealth). What was the difference? The ability to save consistently.
When we can save consistently and diligently it proves that we are able to live below our means. Wealth builders absolutely live below their means over long periods of time (how can you build wealth if you are spending more than you make?)
Below are 3 simple tricks to help you assess your wealth building skills in regards to savings;
- Wealth builders establish a savings rate ahead of time. Wealth builders establish a savings rate before the earnings come in the door. They pick a number and they set the rest of their finances around that savings rate. The savings rate is usually much higher than what most people imagine. It’s not uncommon for wealth builders to save in excess of 20% of their gross earnings (and sometimes substantially more). It helps to have increased earnings for sure but higher earnings also create additional social pressures to keep up with others at higher social levels. Compare this with what most people do. Most people spend money as it comes in and then somehow imagine that some will be left over to save. That doesn’t work. Unexpected expenses come up, poor planning is done and additional debt is usually the result which only diminishes future savings as now there is interest to be paid on spending that was done to fund past expenditures.
- Wealth builders pay themselves first. Wealth builders pay themselves first. As money comes in, savings is the first thing that gets taken off the top. Once the savings mandate is accomplished, spending on other areas is initiated. Weekly paycheck means weekly savings. Annual bonus means additional annual savings. Wealth builders focus on their wealth as their top priority and they know that savings is their top priority.
- Wealth builders leave themselves a margin of safety. Wealth builders know their rough budget allocations and then leave themselves some wiggle room in case unexpected items arise. They know things like their estimated tax rates, how much they spend on housing, autos, food, children, vacations and the common budget buckets. They don’t crank up one bucket to the detriment of their savings. If they know that their federal and state tax rates are 30% annually and that they want to save 20%, then they also know that they only have 50% of gross income for all remaining items. Committing themselves to housing costs that exceed a high amount (like 30% of gross) would only leave them 20% for all other areas of life (food, travel, clothing, autos, children, charity). They know that would be unrealistic and wouldn’t leave them any margin of safety for unexpected expenditures.
“You can make two mistakes in regards to saving during your life. The first is to save too much. The second is to save too little. One is easy to correct (open up your wallet and spend). The other is impossible to fix later in life when it is too late.” – Paul Kindzia
Two good habits to get into for your wealth building is to establish a savings rate ahead of time and to pay yourself first.