Wednesday, May 27, 2009

Our Principles for Saving

To me, saving is the primary skill that enabled us to build wealth. As they say, it's not what you make, it's what you keep that makes a person wealthy. While I didn't realize it at the time, we lived by a set of principles to guide how we saved. Here are the three key elements:
  • Start early. I remember saving my allowance, which was in coins, for future purchases when I was a child. I opened my first IRA while in college. When I started my first job, I also made sure that I saved part of my monthly income.

    Saving early has two benefits. First, it makes saving a habit. Second, it allows the magic of compounding to work.

  • Save often. There are lots of opportunities to save and we tried to use them. 401Ks, IRAs, stock accounts, CDs, and other investments. Another opportunity is to save part of or all of a raise. Also, we saved prior to making a large purchase, since we believe in paying with cash, instead of using credit.

  • Save a lot. I realize now that my target should have been 20% of my income, which we achieved just before taking early retirement. For most, a target of 12% of income is more manageable, which we were doing most of the time. Using these 12% and starting before 35 will enable a person to save 12 times their salary by 65 years of age.
  • I've followed these savings principles through good times (the 1983 to 2000 bull market) and bad times (three recessions) when we were working. Even though in early retirement, we continue to save by putting money in Roth IRAs up to the maximum limit or 100% of our income, which ever is lower.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or saving advice. Please consult a professional advisor.

    Copyright © 2009 Achievement Catalyst, LLC


    Manshu said...

    I think what sometimes happens is that we save for a long time consistently and then get carried away and blow it all away. So one expensive holiday could eat into what you saved for months or one expensive dinner could eat away what you saved for an entire month.

    Bret said...

    Saving is the most fundamental concept of building wealth.

    It's amazing to me how many people want to become wealthy, but they don't want to save money.

    This is great advice: Save early and save often.