Saving money is a little bit of an obsession of personal finance and early retirement bloggers. We fill the digital airwaves with wickedly creative “hacks” to save a buck or two with virtually everything we do. Like going out to eat. Or shopping in bulk. Or refusing warranties .
Surely, saving money has something to do with getting rich, right? If not, why would so many of us talk about this stuff so much? There has got to be something meaningful to saving some cash, right?
Kinda. But maybe not the way you think.
Saving money has little to do with getting rich
The act of saving money won’t, in and of itself, make anyone rich. Ordering water instead of soda or beer at restaurants might save you a few hundred dollars over the course of a year. But let’s face it: A few hundred bucks isn’t life-changing money. If ordering water were the Easy button to achieving early retirement, we’d all be retired and sipping margaritas in paradise.
Sadly, compound interest doesn’t materialize out of thin air.
Early retirement is enabled by household wealth. How much money you have, rather than how much you save.
It is true that saving money does not lead to wealth. That said, there’s nothing wrong with saving some cash by changing up your spending habits you developed over the years. Saving money is great. It’s wonderful. It all helps.
It’s just not the secret sauce to early retirement.
Wealth comes from a very different source: Investments. Here, take a look at a pretty graph that puts in chart form what little effect saving money has over your household wealth. The upshot is, it’s not about how much money we have. Wealth is a direct byproduct of what we do with that money. That's what enables early retirement.
Keep your savings in a Ziplock baggy under your mattress and you won’t prepare yourself for anything beyond the apocalypse. And even then, I doubt your local merchant will be around anyway to accept your cash for a loaf of bread because their credit card processing machine was destroyed in the nuclear blast that annihilated most of humanity.
Come on, now. Let’s be real.
Where saving money helps early retirement
Naturally, I support the idea of saving money. While it’s true that saving money alone won’t do a damn thing to enable a blissful destruction of your alarm clock, "Office Space"-style, for the rest of your life, it’s flat wrong to plainly state that saving money has nothing to do with it.
I like to think the equation that solves the early retirement riddle is actually quite simple: Your money’s purpose + Your motivation = Your chances of getting free.
Let’s say you have all the motivation in the world to call it quits. All right, you have one element of the equation firmly in hand. You want out, and bad. The other element revolves around your money’s purpose. In other words, is your money working for you or are you working for it? If the former, you’re in good shape. If the latter, you’ll probably celebrate your 60th birthday sitting in an office building somewhere.
Invested money has a purpose, and the more money that you have to invest, the easier this equation becomes. And the sooner you’ll be sipping a Sex On The Beach while at least sitting on the beach.
I’ve burned through a hundred additional words to basically say this: Invest your savings. Simply “not spending it” isn’t enough. That dough you saved by ordering water in restaurants instead of your Coke or Pepsi? Don’t just “not spend it.” Invest it. Get that cash in the market and let compound interest run its course like it has for so many of us who enjoy life outside of the confines of a full-time job.
It works, guys. Trust me, it really, really works.
It doesn’t matter how much you earn or save
People get rich in a variety of different ways. Unless you won the lottery or inherited a crap-ton of money, you’re probably in the same boat as the large majority of people in first-world countries. You’re fighting for your life, every day. You go to work and earn a living. You provide for your family. You try to have as much fun as you can along the way. Sometimes, it works.
Congrats, you’re just like 98 percent of the people in your country.
The nice thing is you don’t need to be the most frugal person on your block. You don’t have to start and sell a company for millions of dollars. Hell, you can even order a Pepsi at restaurants every time you go – if that’s what makes you happy. None of that matters as much as one very simple, yet profoundly important, question: What is your money’s purpose?
How to give your money purpose
If giving your money purpose is the key to early retirement, how does this happen?
Know where your money is going. You can’t begin to un-screw your financial situation until you realize where your money is going. Budgets can help but, frankly, your bank statement is all you really need to determine where your money is going and, importantly, whether your spending is setting you up to meet, or fail, at your financial goals.
For example, those damn automated monthly payments for services that you may no longer use are killers. They were for us. Because you don’t have to lift a finger to make those payments, you quickly forget that you’re making them. Bank statements help. Just look at ’em. Can you justify it all?
Care about your future. This is more critical than most people realize: You need to care about what happens to your future self. Yes, we all want to be “successful,” but what does that mean? Do you actively want to retire early, or are you content with working through the traditional lifespan of a typical worker in our society? In 20 years, do you see yourself living in the same house? Working the same job? Driving the same car? What will change?
For the record, it’s okay if you have no interest in retiring early. But knowing exactly what you want out of life – whatever that happens to be – will guide your money’s purpose.
Invest . If your company matches 401k contributions, at least contribute that amount. Remember, 401ks are pre-tax money, which means not only is your company shoveling you cold hard cash, but you’re lowering your tax burden by a dollar-for-dollar contribution into your 401k account.
Brokerage accounts work, too. We like Targeted Retirement investment accounts and have heavily utilized their automatic diversification strategy so we don’t have to worry about all that. Seriously, we just throw money into our brokerage account and literally forget it. There’s no secret sauce to getting rich in the market. Besides time. You gotta give it time.
Persistence. Early retirement is easy, but it’s not quick. It takes time, just like most goals worth striving toward. Avoid the rookie mistake of expecting 20 percent capital gains in the first year of investing your dough. It doesn’t happen that way, even in today’s outrageously lucrative market.
Your life’s purpose takes time, just like your money’s. Don’t expect miracles with your money. Reality doesn’t work that way. Budget and invest. Then, stick with it. I mean really stick with it. Keep throwing those greenbacks into your investment accounts. Month after month. Year after year.
That persistence adds up into mountains of cold hard retirement cash.
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A version of this article originally appeared on Think Save Retire.
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