There is a direct correlation between the length of your journey to financial independence and your savings rate as a percentage of your after tax income. Achieving financial independence is all about increasing your savings and cutting material expenses.
The first rule of achieving long term financial freedom is to pay yourself first. By systematically setting aside a percentage of your paycheck you will be putting yourself in the best position not to spend money and instead invest for long term growth. After a while you won’t even miss the contributions and the satisfaction you receive from watching your savings grow will far outweigh the forgone stuff.
Couple automatic savings with the increases in income over a typical career and the payoff is enormous.
The best place to make these automatic savings for the biggest payoff is in a tax deferred account like a 401(k) or IRA. If your employer offers an automatic match to your contributions the return on investment up front is already huge and over time will compound exponentially into greater wealth.
The second rule is to spend less than you make. In financial planning we like to say, “It’s not how much you earn that is important, but how much you keep.”
There are many horror stories of professional athletes that have signed big multi-million dollar contracts only to find themselves bankrupt soon after leaving the playing field. Even though you may have a multi-million dollar income, spending less than you make means you can save and invest for the day that you no longer have to depend on a paycheck. No matter how much money you make, if this basic tenet is not followed, the rest of your financial plan completely falls apart as your savings rate would be zero or negative.
Automate your monthly savings plan to pay yourself first and make saving easy and convenient. Work with your financial planner to increase your savings percentage with each additional increase in income. Financial freedom is about forgoing the additional pair of unneeded shoes and instead saving and compounding that money for the ultimate payoff of not having to worry about your income.