This conversation happens every weekend at family reunions and backyard BBQs: The dominant financial discussion is how much someone makes or will earn with their new job. We measure how well our brother-in-law’s doing based on the income he pulls down.
Our culture puts income on a pedestal—but this misses the point entirely. What I’ve found to be the biggest determinant of financial success is not how much you make, not how much your net worth is, and not the rate of return you’re getting on your investments. But it’s this: What percentage of your income are you actually saving?
It doesn’t matter how much you make. What matters is how much you save. And I mean really saving—like sticking into an account you won’t see until retirement. So how can you save more?
1. Know How Much You Need
I get asked a lot: “How much should I have saved by now?” Ideally, you want three to six months’ worth of expenses in an emergency fund where you can access it easily. Then retirement is a whole other ball game.
Let’s assume in retirement you’re going to maintain the same standard of living you have now—or close to it. How much should you have saved? Here’s the best rule of thumb I’ve ever encountered. It’s what I call the Millionaire Formula from the book The Millionaire Mind by Thomas Stanley.1
Here’s how it works: First, take your household income and multiply it by how old you are. Then divide by 10. This is the amount you should have saved by now.
For example: If you’re 40 years old and earn $150,000 per year, then 40 times $150,000 is $6 million. Divide that by 10. Therefore, you should have $600,000 saved.
I recommend this formula because many families I’ve encountered say, “Andrew, I’ve done it! I crossed the finish line! I’ve saved $1 million dollars!” That’s fantastic! It’s a big accomplishment. But if they’re earning $300,000 a year and have been investing for 30 years—that $1 million isn’t going to be enough to maintain their lifestyle in retirement. They’re going to blow through it so quickly.
2. Save 20% of Each Paycheck
Now that you know how much you need, how can you get there? Let’s get practical.
The best formula for saving more actually starts off with giving. The Bible says your tithe belongs to God. So the first transfer you’re making or check you’re writing once you get paid is 10% to your local church. I’ve seen it time and time again—if you cheat God, you’ll always cheat yourself.
Then saving is the next priority. I encourage you to save at least 20% of your gross income into long-term investment accounts. This should be your goal in order to reach and maintain the Millionaire Formula.
This isn’t delayed spending where the money goes into a savings account for you to use it later. This is playing the long game. Investing 20% is critical to making sure you have enough for retirement—and you may need to consider increasing that amount if you’re behind and need to play catch up. That’s where a financial advisor can really help.
By saving 20%—not including a 401k match—you’ll be on the road to financial success because you’ll be saving enough to help jumpstart compound interest.
3. Save Raises and Promotions
One of my favorite strategies to save more is to start with your raises and promotions. What do most people do with any increase in income? That’s right—they increase their spending. Their standard of living goes up.
But when you get a pay raise, don’t automatically upgrade your lifestyle. What I recommend is that you save half of your new increase in income. Why? Because you’re not used to making this new amount, so you’re not missing anything. Now with the other half—enjoy it! Spend it! It’s all yours.
If you practice this approach methodically and increase your savings rate with every raise over time, you’ll catch up to or even exceed that goal of saving 20%—and you won’t even realize it.
4. Keep a Spending Plan
I encourage my clients to save more by working with what they already have. Find money that you’re haphazardly spending that could be going toward retirement instead. How can you do that? Write down your spending so you can see where your money’s actually going.
I call this a spending plan. First, write down where you’ve been spending your money over the last three months on a monthly basis. Put every transaction into two major categories: 1) mandatory and 2) discretionary. If you’re married, go down the list with your spouse and do it together. Then repeat this exercise at the end of every month so you can stay on top of it.
The cold truth is that once you’ve figured out what’s mandatory, everything else is technically discretionary. Let this exercise help you cut out what you can and squeeze your belt little bit tighter—because it could be the difference between saving for retirement or working well into your 70’s before you can retire.
The estimated lifetime value of a Starbucks customer is over $14,000.1 You might think you’re buying a $7 latte, no big deal. But frequenting the coffeeshop can equal hundreds or even thousands of dollars per year that you could have put into retirement. This is just one example. If you’re not a coffee drinker, replace it with whatever your Achilles heel is. Decide if it’s truly worth it. Then make the hard calls that are going to pay off down the line.
5. Save Your Tax Return
Stop looking at your tax return as a gold mine. Tax returns are wasted, rarely invested, and never given away. Instead, see your tax return as a forced savings account that the IRS has set up for you.
Many times families will receive over $5,000 as a tax return, but what do they do with it? That’s right, they spend it. There are entire industries out there that focus once a year on making sure they separate you from your tax refund.
Instead of spending it, take this large lump sum and add it to your Roth IRA or invest it in your future. You’ll never miss it. Put it an investment account, and you’ll be shocked at how much it will grow over time. Believe me, when it’s time for you to retire, you’ll be glad you did.
Planning ahead and saving money allows you to be a good steward of what God’s given you.
Proverbs 6:6–8 has an example for us: “Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and its food at harvest.” Saving for the future allows you to be prepared for the future.
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