How to Save More Money & Build Wealth Faster
Hey U30 Nation,
I recently did an Instagram poll and a lot of your feedback was learning more about how to save money. In order to teach you more about saving money, I want to start off with the most important topic when it comes to saving money and that is your savings rate.
A savings rate is simply the percentage of your income you save per year.
In my case, I save money at a very high rate. I usually spend about $1,200 per month on average on cost of living which means if I make $5,000 during the month for example then I would be able to save $3,800 minus whatever I pay in taxes. My savings rate is above 75% without regarding taxes and after taxes it still would be above 50%.
This is just an example situation because my income varies by month since I work multiple side hustles.
In order to achieve a high net worth at a young age, you need a high savings rate. To obtain a high savings rate you must keep your cost of living low as well as increase your income. Let’s look at some math examples of what can happen over 10 years if you start saving today.
To keep variables the same, we will assume you have an after tax income of $40,000.
First let’s break down the saving percentage goals:
- If you save 10% of your $40,000 you’ll have $4,000 in the bank
- If you save 20% of your $40,000 you’ll have $8,000 in the bank
- If you save 30% of your $40,000 you’ll have $12,000 in the bank
- If you save 40% of your $40,000 you’ll have $16,000 in the bank
- If you save 50% of your $40,000 you’ll have $20,000 in the bank
- If you save 60% of your $40,000 you’ll have $24,000 in the bank
- If you save 70% of your $40,000 you’ll have $28,000 in the bank
- If you save 80% of your $40,000 you’ll have $32,000 in the bank
- If you save 90% of your $40,000 you’ll have $36,000 in the bank
- If you save 100% of your $40,000 you’ll have all $40,000 left to put in the bank
Before we see the compounding effects over 10 years, ask yourself when the last few scenarios could occur where you are able to save 80%, 90%, and even 100% of your take home income!
My thought is if you are the spouse of someone who makes enough money to cover your family’s cost of living. This would allow your income to be dedicated solely to putting it away in the bank. This is known as the “Live Off Of One Income Strategy.”
Other times you can have high savings rates are in your younger years when your parents cover many of your expenses allowing you to save your money you earn. This is one way I was able to save up a lot in my teens and early college years.
If you were to just save your money in a bank account and not invest it here is what would happen after 10 years:
- $4,000 per year would turn to $40,000
- $8,000 per year would turn to $80,000
- $12,000 per year would turn to $120,000
- $16,000 per year would turn to $160,000
- $20,000 per year would turn to $200,000
- $24,000 per year would turn to $240,000
- $28,000 per year would turn to $280,000
- $32,000 per year would turn to $320,000
- $36,000 per year would turn to $360,000
- $40,000 per year would turn to $400,000
Now if you invested that money then it would grow even larger because you would earn interest on your annual savings plus you would earn interest on your interest which is known as compounded interest. Here is what your wealth would amass to if you saved at the different rates based on a $40,000 take home pay.
10 Years Timeline and a 7% average return on investment:
- 10% savings rate =$59,000 (vs $40,000 not investing)
- 20% savings rate = $118,000 (vs $80,000 not investing)
- 30% savings rate = $177,000 (vs $120,000 not investing)
- 40% savings rate = $236,500 (vs $160,000 not investing)
- 50% savings rate = $295,600 (vs $200,000 not investing)
- 60% savings rate = $354,800 (vs $240,000 not investing)
- 70% savings rate = $414,000 (vs $280,000 not investing)
- 80% savings rate = $473,000 (vs $320,000 not investing)
- 90% savings rate = $532,000 (vs $360,000 not investing)
- 100% savings rate = $591,000 (vs $400,000 not investing)
You can clearly see the difference between savings rates as well as the difference between investing your savings and not investing. It’s all in the math. If you want to achieve substantial wealth by age 30 you have to run the numbers to see what it is going to take. If you are 30 years old right now, run the numbers to see where you can get to by age 40 or age 50 or age 60. Use this investment calculator here by BankRate.com
Where Would Nick Stand at Age 30 Based on Current Savings
If my take home pay was $40,000 after tax from the above example and my current cost of living is $1,200 per month, I would spend roughly $14,400 per year on cost of living. Subtracting this cost of living from my take home pay of $40,000 I would be left with $25,600 to save and invest per year. This would put me closest to the 60% savings bracket which means in 10 years I could amass $378,500 if my $25,600 savings earns a 7% average return on investment over those 10 years.
Then assuming I kept this same savings amount of $25,600 per year for another 10 years, I would see my investments hit roughly $1,122,000 by age 42 if you started saving from your job income at age 22. Millionaire status baby.
Whether you start saving at age 15, 20, 25, you can see that in 20 years you can amass a huge net worth from investments alone due to a high savings rate. I just showed you the formula to become a millionaire in your 40’s without considering your house value that you would also have to add to your net worth which is being paid for by your cost of living. Every month, you’d be making a cost of living expense towards your mortgage to pay it down and build equity in your home plus your home value likely would rise over those 8 years as well.
Where Would Nick Stand at Age 30 Based on Current Net Worth
When I turned 22, my net worth was $88,000 approximately. Taking this base number I can calculate what my net worth could potentially be in 8 years from now when I turn 30 based on different rates of return. To do so we would need to assume that I sold all assets I own today and converted them to cash, then paid off my one liability, which results in $88,000 cash to place in an investment account. Combine this with saving away $25,600 per year and factor in a return on investment of:
- 6% = $409,000
- 8% = $457,000
- 10% = $511,000
- 12% = $570,000
- 14% = $637,000
- 16% = $711,000
- 18% = $793,000
- 20% = $885,000
Pretty large net worth by age 30. For those overthinking all of this, yes net worth would be too hard to project 8 years from now because you’ll be buying different assets and taking on different liabilities along with your investment account growing, so this would only be part of your net worth equation but it’s quite a lot of money for being just part of the equation.
Overall, I hope I didn’t bore you with numbers and math today but instead inspired you to calculate your current savings rate and your current net worth as these are the two most important metrics to track over your journey to reach millionaire status. Also consider your current cost of living. How much money are you spending every month on average and calculate your projected annual cost of living. In upcoming articles we can get more into methods for saving money so you cut down your cost of living and create a higher savings rate!
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