Previous post:

Next post:

Best Financial Advice

by retirebyforty on January 14, 2011 · 44 comments

in saving tips

The following is a blog swap post from Crystal at Budgeting in the Fun Stuff, where she covers spending, savings, and the fun stuff along the way. Please check out my post Best Financial Advice I Ever Received over at her site today!

Best Advice

The best financial advice I was ever given was from my parents and I’ve seen it repeated a thousand times since then – don’t spend more than you earn and invest the difference.
No matter how much you make, if you spend more than that, you build no wealth. A person making $1,000,000 a year that spends more will be building no wealth, but a person making $50,000 a year that saves 15% can actually live off of passive income like interest at some point.

How I Follow That Advice

I must have taken that advice to heart because my husband and I have been saving quite a bit since we got our first jobs out of college. We started simply – contributing 6% to my 401(k) as soon as I was eligible since my company matches us up to 6%. My husband also started auto-contributing to his pension plan as soon as he became a teacher.
We also started building an emergency fund on the side since cash padding protects us from 95% of the financial bumps in the road. In 2007, we discovered the Roth IRA and opened one of our own. My husband also started using some of our cash reserves to invest in the stock market – we were just lucky that most of our investments were made after the economic crash.
In short, my husband and I sock away at least 30% of our take home pay every month simply because we do want to build wealth. Our dream retirement is simple – having the time to pursue whatever we’d like within the bounds of our passive income stream. We’re not aiming to be billionaires. We just want enough to live securely and have enough padding to use for our hobbies. It helps that we have cheap hobbies. :-)

Times I Wish Others Would Follow That Advice

Every time I hear someone complain that they will not have enough for retirement, I want to ask if they have been spending less than they earn. I know the answer would usually be “no”, so I don’t ever ask. I just can’t help thinking it.
Secondly, how much do they need to have to retire? I am regularly surprised about how much people say they need to live on in retirement. I have heard people explain that they will need enough to pay for 5-6 vacations a year and fund hobbies that cost hundreds of dollars a pop. Where do these expectations come from?
A healthy combination of realism and savings can do wonders. Once again I ask myself what is the best financial advice I ever received? That’s easy – spend less than you earn and invest the rest.
Would you agree? If not, what is your best advice?

Joe’s comments: I think spending less than you make is the single most important action you can take to ensure financial well being. I never explicitly received this advice from my parents, but I learned it through their actions. Great advice Crystal and Thanks for sharing.

{ 31 comments… read them below or add one }

Darwin's Money January 14, 2011 at 5:13 am

Sometimes the simplest advise is the best advice. Yet so many find it so hard to follow!

Reply

Crystal @ BFS January 14, 2011 at 5:43 am

That is so true.

Reply

Roshawn @ Watson Inc January 14, 2011 at 5:45 am

This is crucial, and it is sad that such common sense doesn’t appear all that common.

Reply

Crystal January 14, 2011 at 8:39 am

Yeah, that is so true too. I sometimes meet people that make me feel like banging my head against the wall…

Reply

Jessica07 January 14, 2011 at 11:44 am

Your parents gave you some really great advice. What’s most significant, however, is the fact that you heeded it and now live by it. :)

I think the expectations for retirement come a lot from commercials: The elderly couple walking along, hand-in-hand, at the beach. Most of us don’t have a beach in the backyard (not a real one, at least), so the implication is vacation. Maybe? I don’t really know either.

Reply

Crystal @ BFS January 18, 2011 at 8:54 pm

I get inspiration from those commercials that they are still old and together, but i kind of ignore the beach part since it usually smells like seaweed, lol. Thanks for the kind words!

Reply

Little House January 14, 2011 at 1:03 pm

Too bad my parents didn’t explicitly tell me this fact of life. I had to learn the hard way! Now, I’m in a catch-up phase that will probably last the next 10-15 years of my life.

Reply

Crystal @ BFS January 18, 2011 at 8:55 pm

I was blessed and know it. Congrats on being someone who figured it out! You are still in an awesome nerdy minority. :-)

Reply

MoneyCone January 14, 2011 at 2:05 pm

There actually was a skit on SNL about this – I didn’t know how this is supposed to be funny! Is living beyond your means the norm?

Reply

Crystal @ BFS January 18, 2011 at 8:56 pm

Yes. It’s sad but true.

Reply

krantcents January 14, 2011 at 5:29 pm

Congratulations, you are doing what you are supposed to do. I wonder what the other people expect when they retire or maybe they won’t retire.

Reply

Crystal @ BFS January 18, 2011 at 8:57 pm

I wonder that too! I only will have room in my retirement house for family or friends so they better figure something out…

Reply

101 Centavos January 14, 2011 at 7:23 pm

Commendable that you’re saving 30% of your income. Sometimes the simplest advice is the best. I also like your retirement goals, just having enough security to be able to do what you want to do.

Reply

Crystal @ BFS January 18, 2011 at 8:57 pm

Security is nice – makes me feel warm and happy. :-)

Reply

First Gen American January 15, 2011 at 10:32 am

The SNL skit on this topic is hilarious. Since my mom lived debt free on a crazy low income, I’d feel like a complete loser if I couldn’t do it on a middle class income. I know someone who had an i-phone and blackberry and complained about not having any money to pay the bills. Come on. In most cases, (except when health issues are involved), debt is completely preventable.

Reply

Crystal @ BFS January 18, 2011 at 8:59 pm

Did you hear about that guy that tried to rob a place with an iphone? He said he needed money for food for his family…I wonder how much his phone plan cost…

Reply

Aloysa January 15, 2011 at 1:44 pm

It is the best advice indeed. In fact, I think lot of people realize it, know it and don’t follow it. We are surrounded by temptations. It is so hard to ignore them. Plus our consumerist culture promotes and encourages spending. Great post, Crystal!

Reply

Crystal @ BFS January 18, 2011 at 8:59 pm

Thanks Aloysa!

Reply

Daddy Paul January 15, 2011 at 4:13 pm

Two other pieces of advice. Look at what you are throwing away and don’t drive an extra mile to save a dime.

Reply

Crystal @ BFS January 18, 2011 at 9:00 pm

Good point! I find the cheapest place on the way home…even if that means I’m paying an extra 50 cents, it also means I get home 10 minutes faster…

Reply

Shaun January 15, 2011 at 6:17 pm

Hey Crystal,

30% is a huge effort, well done!

You were very lucky to have clever parents. Financial education really does start at home, but many people don’t tend to teach it to their kids. This is a really valuable lesson for anyone with a family.

Reply

retirebyforty January 15, 2011 at 7:55 pm

I agree 30% is great!

Reply

Crystal @ BFS January 18, 2011 at 9:02 pm

30%-40% is only possible for us because we both work and have no other financial responsibilites right now, like kids. We are by no means living as frugally as we could, so I feel that I should at least save 30% as some sort of penance, lol. Call it money guilt… :-)

Reply

Buck Inspire January 17, 2011 at 12:06 am

Excellent advice, plus you’re doing your parents proud! 30% savings is amazing. This may be a cliche, but what about a penny saved is a penny earned! :)

Reply

Crystal @ BFS January 18, 2011 at 9:03 pm

According to Len Penzo, a penny saved is actually more than a penny earned because of taxes, lol.

Reply

Trey January 18, 2011 at 11:23 am

“We also started building an emergency fund on the side since cash padding protects us from 95% of the financial bumps in the road.”

I can surely relate to that statement. Our emergency fund has saved our butts more than once. The earlier in life you understand this… the better.

Reply

Crystal @ BFS January 18, 2011 at 9:04 pm

Yeah…we had to replace a whole set of tires about 4 years ago and nearly threw up at the extra $400…now we can meet that head on and keep going without overthinking everything. :-)

Reply

Invest It Wisely January 19, 2011 at 1:11 pm

Spending less than you earn is elementary and is the key to building up wealth for the future, and is very important. I agree that too many people make excuses for themselves, and harboring unrealistic expectations isn’t wise; imo, having an unrealistic expectation that one doesn’t need to save because pensions and/or the government will take care of your retirement is not too wise, either!

Great advice, Crystal!

Reply

Will @ HackingTheBank.com January 25, 2011 at 3:52 pm

Great and simple advice. Something that many of us who read your blog practice (at least now), but it’s easy to forget how many people still ignore this advice. And many don’t even see a problem with living beyond their means. It’s sad when “getting by” has become the norm. I can’t wait until I can save 30% for retirement. Right now doing about that toward my debt, but once that’s gone, it’s onto the retirement accounts!

Reply

retirebyforty January 25, 2011 at 8:14 pm

30% is really impressive. Crystal is doing a great job.

Reply

Glenn @ Financial Coaching with Glenn July 19, 2011 at 5:02 am

Spending less that you earn is only possible if you have a spending plan that allows you to monitor how you are spending your money. And then making a concerted effort to eliminate expenses so that minimum amount of your salary is allocated to investing each and every pay cheque.

Reply

Leave a Comment

{ 13 trackbacks }