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!
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.