In one of my favorite movies, City Slickers, old cowboy Curly (Jack Palance) provided Mitch (Billy Crystal) with the “secret to life.” As silly as it might sound, that little movie advice helped many people including myself. It helped me focus on what I needed in life at that moment and it gave me focus and clarity.
Curly: Do you know what the secret of life is? This! [holds up one finger]
Mitch: Your finger?
Curly: One thing. Just one thing. You stick to that and the rest don’t mean shit.
Mitch: But, what is the “one thing?”
Curly: That’s what YOU have to figure out.
City Slickers, 1991
It’s true. For me, the secret to a happy life is to focus on my family … they are my rock. But when it comes to building wealth the secret is to maintain a high personal savings rate. It should be no surprise that Americans are horrible savers. Over the last 20 years (likely longer), 45-50% of people didn’t save anything in the past year. That basically means they had a 0% savings rate.
Savings Rate = total savings / net income
Gross income minus taxes is your net income. Both of these numbers are on your W2 or the last pay stub of the year (assuming you want annual totals).
If you build a high savings rate, it means you are likely already living below your means. Someone with a high savings rate is demonstrating a discipline of handling their financial life in the pursuit of financial independence. Yes, it’s better to have a high income and high savings rate. But even those with incomes at or below the median household income (less than $55,000 or so) can have a savings rates in the 25-35% range. It takes “will” to live below whatever means you have.
A high savings rate can make up for outrageous investment mistakes too. It’s especially important for older folks (like me) to increase their savings rate because we have fewer years of compounding to work in our favor. In fact, savings rate is even more important than the investments we choose.
You Gotta Have A Plan
Like most important things in life, you need a plan. Suddenly creating a high savings rate doesn’t just happen by accident or on it’s own. You need to track expenses so you know where you can reduce spending. It’s also necessary to determine the mechanisms you’ll use to increase your savings.
Most people only save through their 401(k) at work. It’s easy and automatic, which is what most people need. This is what my oldest daughter (25 years old) is doing. She saves 22% of her money into her 401(k). 15% goes into the Roth 401(k) and 7% goes into the regular 401(k). After you max out the 401(k), the real planning and wealth accelerates.
Saving outside my 401(k) was only done on a rare occasion when I was younger. But that’s also why my net worth was so low. I wasn’t saving a big enough chunk of my income. Like most people, if it wasn’t saved automatically through the work 401(k) then it got spent.
In 2019, I made a commitment to save a certain amount from my bi-weekly paycheck. That plan helped push my savings rate from 30% in 2018 to 39% in 2019. It also helped me create the discipline I’m needing to push my savings rate even higher into 2020 and beyond. The most important part of the process is that we pay ourselves first. It’s an exciting moment every Friday to initiate a money transfer to my Vanguard account knowing that it gets me closer to my retirement goals.
In 2020, I’m getting more aggressive, specific, and exact (based on 2020 expenses – see above chart). I’ve even built into my calculations when I’ll be done contributing to my catch-up contribution in the 401(k) and social security taxes. When these are done I can increase my savings to my taxable account.
My Savings Rate
Believe it or not, but these are the first ever calculations of my savings rate – that fact is embarrassing to me. Remember, I had a $155,000 net worth in 2011 but I’m currently at around $800,000 now. By the time I retire in 5 years, it will be around $1,700,000. It’s no surprise that my net worth was so low given that I never concentrated on my savings rate.
The reason for the rapid rise in net worth is I’m finally getting serious about significantly increasing my savings rate. Prior to 2011, I’m guessing my savings rate was in the 5-15% range … likely closer to 6-10% on average. We had high expenses and debt but I always met the minimum to get the employer match into my 401(k).
In 2020, I plan to saving $85,000 between my 401(k) and taxable account. My taxable account is what I’m using to build a stock dividend portfolio. Here’s the amazing thing about 2020 … the $85,000 savings goal amounts to my total savings in 2014, 2015, and 2016 combined. Thank goodness I woke up and took action. It shows that even late bloomers can quickly change course.
For older folks like myself that are close to retirement, our only hope is to strongly control expenses and save (and save some more). If you are not willing to do this then you will either work longer (or until you die) or you’ll live in poverty. It’s blunt talk but it’s true. I was in this same boat until I got my act together. If I stay on track then I’ll reach my portfolio goal of $1.3M to complement my company pension and social security.
Summary
The one regret you always hear from older folks is they should have saved more when they were younger. I agree with that, especially when I was in my 20’s. As my wife and I were building our family, it got really hard in our 30’s and 40’s to save. This was especially true because we had a single-earner household while my wife stayed home with the kids.
My kids today are learning from my lessons. They’ll save until it hurts because I’ve shown them the benefits of driving a 20-year old car but having $50,000 saved by the time they turn 25 years old. Eventually, they will continue with increasing their savings rate and then their best friend (compounding) will get them to an early retirement.
My increased savings rate is the only thing saving my retirement. Though I’m expecting a 44% savings rate in 2020, I’m also accelerating the payoff of my mortgage which some people include in their savings rate (paying off debt). Plus, my youngest child will graduate college and be off the payroll this year. Within a couple of years, I can see my savings rate jumping to 60% or higher for my last 3-4 years of working.
Like Curly says “One thing. Just one thing. You stick to that and the rest don’t mean shit.” Focus on increasing your savings rate and you’ll build wealth that will change your life and enable you to be financially independent earlier than 95% of your peers.
Thanks for reading!
Mr. TLR