Slow and Steady Wins the Race
Often when I meet with people who are learning good financial principles for the first time, they are anxious to get started and want to do everything perfectly right away. I am glad for their enthusiasm, but this approach may not be sustainable. I would not normally recommend that people immediately start saving 20% of their income if they are only accustomed to saving 5%. That would be like trying to run a full marathon if they had never run more than six miles at a time. Marathon trainers recommend starting with a much shorter distance than the full 26.2 miles, then adding no more than 10% to the training distance each week. Otherwise, trainees could injure themselves and lose months of progress.
Likewise, too big of a sudden increase in savings could cause “financial injuries” such as increased credit card debt, marriage tension, or spending binges. We may even become so frustrated that we stop saving completely. Of course any level of savings requires some sacrifice, but starting with a realistic amount that does not hurt too much is more healthy and sustainable. Then we can gradually increase it over time.
How to Get Started Saving
Those who are not saving anything at all right now might even want to try starting with only 1-2% of income. Most people are surprised how little they feel the difference when they increase their savings by modest amounts. Then gradually building from there is easier. Just remember that whatever amount we decide to save now, in the future we are likely to wish we had saved more.
A great time to increase the percentage of income that we save is when we get a raise, bonus, second job, or pay off a debt, before we get used to spending the higher net income. We should not feel obligated to save all of our increase, though. We should celebrate our successes by spending some of those nice income boosts along the way on fun things we have been craving. This practice will help motivate us to continue moving forward.
Occasionally I meet with people whose income just increased dramatically, even by as much as four or five times their former income, or who just paid off some very large debts. That is a perfect time to immediately start saving a much higher percentage of income before growing accustomed to spending at higher levels.
What if I Have No Extra Money to Save?
What if we are spending more than we make each month and not saving anything? The first step is to stop spending so much. If we continue down that road, eventually we will end up bankrupt.
Remember the disastrous oil spill in the Gulf of Mexico in 2010? Before any meaningful clean-up efforts could be started, the gushing of oil into the Gulf had to be terminated by completely capping the well. Likewise, any efforts to clean up our debt would be futile if we do not first stop disastrous leaks in our spending plan by learning to spend less than we make.
Short, frantic bursts of occasional effort to save a lot of money or pay off debts do not result in a lifetime of financial security. Getting out of debt and becoming financially secure are a lot like losing weight and becoming physically fit. If I starve myself for a few weeks, I may lose some weight, but I would gain it all back again if I do not permanently practice healthier eating habits. I may build some muscle by working out three hours one day a week, but I would produce much better results by working out just thirty minutes each day for six days a week.
Financial security is the result of a lifetime of healthy financial attitudes and behavior. It is a slow, gradual process, not a one-time event. Minor cash flow allocation adjustments make a big difference in results over time, just as an airplane pilot correcting her course by only a few degrees can make a difference of many miles over the course of an entire flight. Anyone who consistently saves 20% of income and does not incur any new debts will eventually have plenty of assets and no debt. It is inevitable.
Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.
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