For the great majority of us, there will always be more ways to spend money than money to spend.
As a result, managing money well requires making good decisions. A lot of them.
- Do you take that vacation or save a bit more this year?
- Will you buy or rent?
- Should you go into debt to go back to school?
- Can you afford a pay cut to take a job that makes you happier?
- How much should you save for retirement versus other short-term goals?
Here’s the problem: Decision-making is so mentally taxing. The more decisions we make, the less able we are to make good ones. This is why grocery stores put big displays of junk food near the checkout lanes; after you’ve made 50 decisions on what to buy, your capacity to make a good decision to resist the giant bag of Twizzlers is near zero.
In Michael Lewis’ recent Vanity Fair profile of President Obama, the Decider-in-Chief said this:
“You’ll see I wear only gray or blue suits”…“I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make.”
We may not make daily decisions that effect global economics and national security, but after a long day on our own jobs, it may be harder to decide not to order take out or to take action on earning money on the side.
Often, readers will send me a list of their financial goals, seeking advice: “Where do I focus?” they ask. “What do I save for first?”
These questions lead to my post 6 ½ steps to financial stability, as well as the Richer By The Week workbook that’s part of my email subscriber’s toolkit. But sometimes, focusing on where to save can be an excuse for not starting to save in the first place.
Last week I was having a conversation with Michael Goldman, a local financial planner and the creator of WealthGathering, an app he hopes will help users save by providing feedback on financial behaviors. As Michael was talking about how he designed the application, I loved his philosophy, which is something like this:
You can’t take money with you. If you don’t spend it, somebody will. Someday your ungrateful kids will blow it partying. Your alma mater will build a new dorm. Or Uncle Sam will buy a tank. So saving is really just spending, postponed. Whether you’ll spend money now, rather mindlessly, on a brand new car or a thousand cable channels, or spend it later – mindfully – in ways you value, like traveling, spending time with family, or needing to work less.
If you want to build wealth, to afford things you value, and someday gain more freedom – the freedom to do what you want and work less (or not at all), there’s only thing that matters: How much you’re saving.
What’s important is not how much you’re putting into your 401(k) versus a Roth. Not which hot stock you bought. Not your mortgage rate or savings rate.
It’s how much you are saving.
As a quick example, who is building wealth faster?
- Jim, who earns $100,000 and saves 5 percent of his income or
- Sarah, who earns $50,000 and saves 20 percent of her income?
Sarah is! In fact, she’s growing richer twice as fast as Jim. She’s saving $10,000 a year and Jim’s saving only $5,000 a year.
The more you earn, the more you can save. But earning more isn’t enough. For example, if you’re saving 10 percent of $40,000 and get a new job at $50,000, sticking with a 10 percent savings rate will get you $1,000 more in annual savings. Not bad. If, however, you decide to save half of your raise in addition to your current savings, you’ll save $5,000 more annually. Not only do your actual savings grow, your savings rate grows from 10 to 18 percent.
As you get older and have more assets and more responsibilities, personal finance can get complicated. But in the beginning, it doesn’t have to be. Just focus on how much you’re saving. (Paying down debt, by the way, counts as saving. You can think of debt as negative savings.)
Have you simplified your financial goals in a way that makes it easy to tightly focus your saving effort? Let me know!
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