Ah, 2006, what a good year. After the previous 2 articles, there’s nothing too memorable to remember from that year anymore, is there? At least it marked the year the Sagrada Familia in Barcelona would take only another 20 years to complete. Just 20 more years.
That’s also when I started tracking my net worth and 10 years later TheMoneyMine household is now approaching the double comma club. This is an article for anyone starting out with their finances to see what a progression to 1M$ looks like.
This article is part of a series on what I’ve learned from tracking my finances for the last 10 years. I’ll post the next articles in the coming weeks and will link back to them in this article, so be sure to check back in.
Part 3 : The Most Effective Tool to Reach Financial Independence
We have seen in the previous article that the main contribution (by far) to my net worth came directly from savings. We also appreciated how much changing jobs and getting increases immensely impacted my overall net worth.
As rightly highlighted by Finance Solver, the main tool – and the most efficient – is the Savings Rate. To use his own words:
High savings rate – the best advice that I wish people understood. I feel like too many people think that they need to sell a business or have an investment banker’s income to be able to retire early or become a millionaire. […]
I think the media has a lot to do with it because they don’t really publicize “look how much this guy is saving!” but rather publicize “this guy sold a multi million dollar business and is now retired!”
I’d like to consider myself part of the media (blogging is a form of media after all) and correct that right away.
Look how much this guy is saving!
To be fair, I have not had high savings rate for a long time. I’ve even had a year of negative savings. It has, however, improved a lot after I started to focus on my finances and realized, unconsciously perhaps, that savings were the most powerful and most efficient tool to get rich. At least, for those of us who can’t run and sell multi million dollar businesses (maybe one day).
- For a long time, my savings rate was really unstable, as the first 3 years can attest. Up until 2010, the Savings Rate average 10%, better than average, but definitely not Financial Independence material yet.
- The first increase in savings rate in 2008 matches with the first salary increase. It was my first attempt at managing “lifestyle inflation”. I do remember consciously trying to convince myself that I hadn’t received an increase to keep my spend under control. That wasn’t an easy task, but the results were immediate. The increase of 2008 translated in higher (and positive) savings rate.
- The second job change and the sign-up bonus in 2011 obviously generated an abnormal amount of savings that year. In my book, a 73% savings rate is really good awesome. Actually, it might even be good in Mr Money Mustache’s book. This bump also created a nice net worth increase that year.
- The dip in 2013 matches the year my wife finished her MBA, when we paid the second year of tuition. Long time readers of the blog will remember that year led to the idea of this blog. As I remember feeling like I had spent 100% of my income that year. It was almost true, going from 73% to 50% to 12% felt like falling off a financial cliff. The 12% came from automatic contributions that my employer was taking off my paycheck. More on that later.
If everything goes according to plan, we’ll finish 2016 around 70%. That’s a long way from the 7% of 10 years ago.
To put things in perspective, let’s see the net worth evolution and the savings rate evolution together. Can you see the correlation?
- Managing lifestyle inflation is key. Since our best tool is our ability to save, it’s important to use it efficiently. Whenever free money comes our way, in the form of a raise, a 401k match or a windfall, it’s best to save as much of it as possible.
- Changing jobs and getting raises is definitely a key contributor to increasing savings. But not a necessary condition. My 2013 spend experience is a good reflection. I “lived the life” and spared no expense. Thinking about that period makes me feel a little guilty. I spent so much money that year.
- Pay yourself first and set automatic contributions. The only reason I saved 13% of my income in 2013 is because my employer had set automatic contributions for the 401k and the employee stock purchase plan. I effectively paid myself first, even though my employer was doing it for me. Without these contributions, I would have ended the year at -6%. Warren Buffett says it best: “Do not save what is left after spending, spend what is left after saving“.
- Consider money as a tool to reach your goals. This made all the difference starting in 2014 when I realized that I had to do something if I didn’t want to keep working until 70. Money is a tool to help me reach personal goals and spending it on stuff like a new car or an expensive watch doesn’t help me. My goal is now to reach financial independence by the time I turn 40.
Remember that “Money is a terrible master, but an excellent servant“. Used efficiently, our hard earned $$$ can work hard for us and the best way to do this is a high savings rate.
Only very few people can make a fortune building a successful company and selling it for millions. That’s arguably one of the best way to riches. Steve showed us how he sold his multi-million dollar business.
For the rest of us, the best tool to get rich is a high savings rate.