Saving is a Mindset
How much should you save? The retirement planning advice industry will give you precise answers, based on your age, earning power, lifestyle, etc. More generally, conventional wisdom says you should save somewhere between 10 and 20 percent of your income starting early in your career. I applaud anybody who takes their future into their own hands. Here’s my take.
The first iron rule of retirement saving is to be sure you’re getting any and all employer matching funds available to them. I’m shocked by the number of people who have employer sponsored 401(k) plans but aren’t taking full advantage of these matching funds. Failing to max out these employer contributions to your retirement fund is like setting a big pile of your own money on fire.
After capturing all available incentive payments, I like to reframe the issue away from numbers (e.g. you should save 15% of income) and toward principles. Saving and investing aren’t really activities. They’re more of a mindset or identity. Savers are people who are concerned with being prepared for the future. Investors are people who believe that the future is bright. Together, being a saver and an investor means being somebody who is creating the bright future they desire.
Once you adopt this investor mentality, then it gets easier to figure out how much to save. The answer is simple: As much as possible, within reason. If that saving is in a tax-advantaged account like a 401(k), then the deferral of income taxes far into the future (when you may be in a lower tax bracket too) is extremely valuable. The magic of compounding returns means that money saved and invested now will grow tremendously over the coming years and decades, allowing us to retire sooner, in greater style and security.
Saving more requires forgoing spending today, and this is where the investor mindset really helps. Investors want to know what returns they will get for their money. In a world full of pleasures that compete for our attention and wallet, it’s important to think carefully about what we’re buying. Some things, like great food, a beautiful home, or enriching vacations will pay dividends in health, happiness, and expanded awareness. Quality clothes, furniture, and other necessities are often a good investment in durability and image.
There are also diminishing returns on all things, so extra (or extra large) homes, constant dining out, vacationing in the highest style, etc. just don’t do as much for us. Toys and luxury goods probably do almost nothing to improve our long term happiness. This kind of spending directly harms our future happiness by starving our investment accounts.
To save the “right” amount, take an investor’s look at your spending. Does all your spending bring a worthwhile return on your investment? If not, then that money could be helping you retire sooner and more comfortably. Not all saving and investing needs to be locked away for retirement — in fact, I think everybody should maintain healthy savings and investment account accounts that lack the tax advantages of retirement accounts. That way, the money is available for any other opportunities that present themselves along the road.
It’s pretty well established that once our needs are met, additional spending does very little for happiness. Once you figure out your baseline needs, try to save and invest as much as possible of the rest. Your kids and your future selves will thank you later.
