Forces – Saving Money

June 12, 2013

Investing

Art of War Chapter 5 Summary explains the use of creativity and timing in building your momentum. The control of a large force is the same in theory as the control of a few men.

Personal Savings Rate

All too often I find individuals focusing far too much energy on investment returns and not enough on their savings rate. The cold truth is that investment returns barely matter when compared to your actual savings rate. We have all heard the common saying “spend less than you make” but how many people actually take it to heart and follow through? How in the world can you expect to build a million dollar nest egg if you barely have enough capital to invest? Popular talking head Dave Ramsey claims saving $100/month over 40 years will generate a portfolio of $1 million dollars, I find that claim absolutely absurd! Not to mention if we continue on our current economic climate $1 million dollars would seem absolutely worthless 40 years from now. $1 million dollars might buy you a house but that’s it, definitely not enough to sustain retirement for the next 20-30 years and that’s assuming you obtain a portfolio of that size. While I did reference Dave Ramsey’s bogus claim, I want to avoid arguing over financial rhetoric and focus on providing tips to increase your savings rate in order for you to have an enormous amount of capital to deploy towards building your financial fortress!

Spend less than you make – Seriously, if you did this one thing you would be far ahead of your peers. If you net $2500/month from your paycheck your budget should be less than $2500.

Eliminate All Debt – Yes you heard me correctly. Destroy any and all debts that you have and after you have done this absolutely refuse to incur any other debts throughout your entire life. There is a huge debate in the financial community about paying off mortgages early. My personal opinion is unless you have an extreme amount of financial knowledge and job security it is in your best interest to pay off your mortgage as quickly as you can. I believe a lot of individuals assume that you will always have a job and times will always be rosy, my motto is to “prepare for hard times when things are good and grind through the suck when times are bad.” Deploying every extra dollar you have available towards debt during your early years will provide a substantial benefit throughout the remainder of your life.

Financial Responsibility and Courage – It is very easy to feel sorry for yourself when facing extreme amounts of debt. I know all too well that the first step is the hardest, however I firmly believe if you have the courage and will to fight your debt then you will succeed. No it will not be easy, in fact it will be a constant struggle but anything worth having doesn’t come easy.

Consumer Addiction

In our current day and age the marketing industry has laid siege to our households and wallets. Let’s think about it, you cannot go ANYWHERE without seeing an advertisement to buy something.  And if you want to get technical they are past laying siege to your household, they have broken through the gates! If you turn on your television you are bombarded with advertisements, movies, tv shows, etc that tell you what you should be eating, drinking, wearing, buying, the list could go on for days!

I have compiled a “bare necessities” list of expenses that the common family needs in order to survive. In my opinion if you are trying to get out of debt or build a financial fortress through stocking investing or real estate, then you should put this list into practice.

Shelter – We all need a place to lay our heads. What we do not need is a Mcmansion where we only utilize 50%-60% of the entire square footage on a daily basis. I have friends and family who own these massive homes and they have admitted to me on several occasions that they barely use half of it. The fact is as human beings we should be active, getting out of the house and interacting with others. It is imperative that you differentiate between the space you actually need for your family and the amount of space “society” tells you that you need.

Food – Our number one energy source in terms of survival. I understand the stress and time constraints are daily lives present to us, however foregoing fast foods or restaurants will save you tremendous amounts of money in the long run. To be quite honest chances are you will eat healthier as well. My wife and I recently started the paleo diet and have noticed that we spend less at the grocery store than we normally would.

Clothing – I would never advocate looking like a complete bum but I also find the notion of paying hundreds of dollars for clothing items absolutely absurd. I personally do not have a huge closet full of clothes and the clothes I do have are very presentable yet reasonably priced. Take your focus off of name brands and focus on the price tag instead.

Transportation – In my opinion a car is for one thing and one thing only, getting from point A to point B reliably. I’ve never been fascinated with all the gadgets cars come with and to all those out there who are car buffs I would normally say sorry out of politeness but I’d be lying. I’m not sorry, I find the idea of spending $40,000 on a car gut wrenching. Don’t worry about what you’re driving and how it stacks up to your neighbor or co worker. Focus on having a dependable vehicle that serves its purpose, after all a car is nothing more than a depreciating asset that has expenses along with it.

Financial Sacrifice

Sacrifice. It’s definitely not something you hear about or see every day, you wouldn’t be quick to consider it a modern word. People hear the word sacrifice, and instantly fear something will be stripped away from them, it’s no longer a word of beauty. Sacrifice, to most people, means loss in a world that tells us we deserve everything. But I believe sacrifice is a victory in this financial war because it requires us to give up something for someone or something you love more than yourself. Perhaps you desire to leave your children with your estate so they can pursue their dream career or send them to college without drowning them in debt the second they graduate. Sacrifice while bitter ensures long term victory.

What financial sacrifices are you making?

 

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40 Responses to “Forces – Saving Money”

  1. Glen @ Monster Piggy Bank Says:

    I think we would probably utilise less than 50% of our house on a daily basis. On the weekends would likely be more though.

    Reply

  2. JC @ Passive-Income-Pursuit Says:

    “Sacrifice, to most people, means loss in a world that tells us we deserve everything.”

    I loved that line because in our instant gratification constant consumerism society that’s so very true. I believe that everyone does deserve everything, but that doesn’t mean that you don’t have to work for it or give something up along the way.

    I like Ramsey’s advice in general but once we come to the investing I don’t really follow. He bases his numbers off of 12-15% annualized returns and that just seems high to me. Yeah you can do that for a few years in a row if you’re in the right mutual funds but over a 30-40 year time frame I don’t expect anyone to be able to do that with mutual funds. To me you’re too diversified to be able to keep that up for that long.

    Most people should focus on achieving market returns through index funds and then do everything else to increase their savings rate. Earning 10% on $1,200 is $120. Earning 8% on $5,000 is $400. Unless you can push your investment returns to something like 20-30% per year you’re going to come out way ahead with increasing your savings rate. And if you are lucky or good enough to get those kinds of returns it’ll just be magnified with a higher savings rate.

    Reply

    • Marvin Says:

      I agree with your insight 100% JC! Ramsey gives great advice when it comes to personal finance and getting out of debt but I shut down whenever he starts talking about investments.

      Reply

  3. Kurt @ Money Counselor Says:

    I think you’ve nailed it Marvin. For most people, getting out of debt requires sacrifice. I think your ‘bare necessities’ strategy is a great ‘battle plan,’ for those who are serious about paying off debts and retiring comfortably. For those who aren’t, focus on staying fit and smart because you’re going to be working until death, more than likely. And maybe that’s okay.

    Reply

    • Marvin Says:

      Great point Kurt. People need to figure out what they want. If they’re not willing to sacrifice then they need to be willing to pay the price.

      Reply

  4. krantcents Says:

    I have lived on less my entire life. I saved and invested achieving financial freedom in my late thirties. I really do not feel deprived or that I am sacrificing anything. I could spend more, but I would not be happier. I have done all the things that are important to me. It helps that I never had consumer debt and always planned for the future.

    Reply

    • Marvin Says:

      Glad to hear it Krant. It’s a great thing when we don’t place satisfaction on the value of our things.

      Reply

  5. KC @ genxfinance Says:

    Let’s say I’ll be filthy rich, I don’t think I’ll spend millions on a huge house. I know some of them too and I’ve also heard that it’s lonely. Sometimes, they don’t see each other for days even though they are living under the same roof. And it’s a pity. Anyway, sacrificing in order to achieve something better, your goal, that we don’t really mind doing.

    Reply

    • Marvin Says:

      It’s crazy how people live in those houses and don’t see each other. I would personally rather have a modest sized house and a decent amount of land.

      Reply

  6. Untemplater Says:

    Spending less that you make and getting out of debt is the way to go. I started saving so much more money once I got rid of the urge to consume. When I do spend money, I pay off my credit card in full and make sure I’m buying something that I really need.

    Reply

  7. My Financial Independence Journey Says:

    I’m so glad that you mentioned sacrifice. One of the themes that I seem to continually revisit in my life and my blog is that of trade offs. You can’t have it all, so which which route are you going to take. Buy stuff now or invest for the future?

    It’s exactly like managing your forces in war. You only have so many troops and equipment. How are you going to deploy them for victory? How are you going to raise more?

    Reply

  8. John S @ Frugal Rules Says:

    I am so glad you mentioned sacrifice Marvin. It is definitely a counterintuitive ideal in today’s society as so many view it as so burdensome when it really is not. I find that it brings balance to a world preaching the “I need it now” mentality.

    Reply

  9. James Weston Says:

    It is sad how few people in today’s society understand that concept of sacrifice. Our generation is a soft one, I’ll admit. Great article!

    Reply

  10. Maggie@SquarePennies Says:

    Getting down to the basic needs is a clear-headed reminder of what is a want and what is a need! Setting a savings goal is of paramount importance to achieving your financial goals. And you are right about saving being more important than investing!

    Reply

  11. Laurie @thefrugalfarmer Says:

    LOVE this, Marvin!! I totally agree on all points. It’s funny, because the way we live now – largely necessities only purchases, was so “normal” and commonplace 100 years ago. Buying other than what you needed was largely unheard of until the roaring twenties. Now it seems to be the norm to have whatever you want.

    Reply

    • Marvin Says:

      Very true Laurie! I’m use to not having everything I want so it’s common for me to sacrifice but I truly feel for those who have been given everything they ever wanted and now think that is the norm.

      Reply

  12. Greg@Thriftgenuity Says:

    The only thing I might add to the list is some form of telephone, but we do not need crazy data plans and smart phones. Something for general communication should be fine.

    Couldn’t agree more with the overall message. To quote Fight Club “We buy things we don’t need with money we don’t have to impress people we don’t like.”

    Reply

    • Marvin Says:

      Good point Greg! Communication is vital but as you pointed out we don’t need to go crazy with $200/month cell phone plans.

      I really like that quote from Fight Club! Thanks!

      Reply

  13. Martin Says:

    I wish there were better and faster way how to save and get rich, so you can have that Mcmansion, but unfortunately I couldn’t find such way. I can see that debt is really a big hurdle which can destroy all your efforts very quickly.

    Reply

  14. Dividend Tactics Says:

    I have to say I really love this idea of describing how to apply Sun Tzu’s Art of War to the world of investing. Will have to go back and read the previous posts in this series

    Thanks for sharing this,
    Michael

    Reply

  15. Todd @ Fearless Men Says:

    When you talk about eliminating all debt, does that include your mortgage (and of course, you want to pay it off quickly as possible)?

    Reply

  16. Betsy @ ConsumerFu Says:

    This!

    “Sacrifice, to most people, means loss in a world that tells us we deserve everything. But I believe sacrifice is a victory in this financial war because it requires us to give up something for someone or something you love more than yourself.”

    Reply

  17. Pretired Nick Says:

    I really like the contrast between the earnings rate and the savings rate. I’ve never heard it put exactly that way, but that is really the critical factor. I may steal that idea for a post of my own. Great stuff!

    Reply

  18. Harry @ SMJ Says:

    You’re right. The key to financial success in the long run is living below your means and investing in the right places.

    Reply

  19. Jon Maroni Says:

    I love your call to financial courage, to face into your situation and begin to take the small steps to conquer it. I have friends who refuse to look at their bank account or credit card statements because they are fearful of what it will reveal. Like reading it will open a pandora’s box of financial trouble.

    Reply

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