Your Savings Rate Will Determine Your Financial Success

Harry decided it was finally time to lose the extra 10 lbs he'd been carrying around since his kids were born.   So he went to his local gym and hired a personal trainer. 

Harry religiously met with Jill, his trainer, for 6 weeks.  He did everything she told him, including his routine on the days he didn't see her.  He initially lost a couple pounds, but soon gained it back.  Frustrated, he confronted Jill. 

She agreed that he was working his butt off in the gym.  "But," she asked "what's your diet like?"

Harry then went on to describe the muffins he eats for breakfast and the burritos he eats for lunch and the cookie (or two) he eats when a coworker brings some into the office.   And don't forget the pizza and a cupcake every Sunday night.

Jill explained that losing weight is 80% diet and only 20% exercise.  Without eating right, Harry could spend 24 hours a day in the gym and not lose a single lb. 

Last week, we explored one of the universal truths about behavioral finance (the study of why people do the wrong thing even when they know what the right thing to do is).   If you missed it, you can find it here.

This week's related. 

Universal Truth #2:  Your Savings Rate Will Determine Your Financial Success

How much you save is your diet.   Your portfolio returns is your exercise.    

You can't possibly lose weight by only going to the gym.  You have to eat right too.  In fact, if you want to lose weight, you don't even have to go to the gym. You can just eat right.

Similarly, it's possible to invest all your money in low-yielding CD's and as long as you are saving enough, you could still enjoy a fulfilling retirement.

Alternatively, you could get 20% annual returns and if you're not saving enough you'll be eating cat food in your kid's basement when you retire. 

Focusing on how much you save means you're free so spend whatever you want on whatever you want with all your other money.  If you are saving (and not going into debt), then you know you are living within your means.

So what's a good savings rate? 

20% of your annual income is ideal. 
15% is okay. 
10%  - you're sacrificing tomorrow for today. 
5%  - pick out your favorite cat food

A 20% savings rate is your "maintenance diet" if you're at your perfect weight.  But are you at your perfect "financial weight?"  In other words, how much should you have already saved?

According to the personal finance classic The Millionaire Next Door, your current savings should equal 10% x your age x your income.  So if you're 50 years old and make $100k per year, you should have $500,000 (10% x 50 x 100,000).

If you hate math like most people, here's a cheat sheet:

If you're below your number, then you need to save more than 20%.  If you're aboveyour number, then you've got some wiggle room.

If you're really far from your number, talk to me before you freak out.  The advantage of working with a financial planner is not having to use rules of thumb.  I've got all sorts of levers we can pull to get you caught up. 

That said, there are no silver bullets.  Historically market returns average 8-10% annually.  And that's not something you can increase, which is why it only determines 20% of your financial success. 

The other 80% is how much you're saving. 

I can tell you how to exercise and eat right, but at the end of the day you're the one getting on the treadmill and putting food in your mouth.  

You Can't Improve What You Don't Measure

"If you can't measure it.  You can't improve it."
       - Peter Drucker

"Behavioral Finance" is a relatively new field in the financial planning industry.   It seeks to explain why so many people do the wrong thing even when they know what the right thing to do is.

As a financial planner, people financially undress in front of me every day.  I know things about my clients no one else knows.  Not their friends.  Not their neighbors.  Often, not even their family.

This puts me in a unique position to see how people behave financially.  After many years of observing people's behaviors towards their money, I've discovered some universal truths which I'm going to explore with you over the coming weeks.

Here's the first one:

Truth 1) No one spends LESS than they think they do.  (And neither do you.  Promise.)

Whether you make a lot or a little... whether you're old or young… whether you're a spender or a saver - it doesn't matter who you are - you spend more than you think you do. 

I think we can universally agree that knowing how much you spend is pretty important.   At a minimum if you don't know how much you spend, you don't know how much money you need to retire.   And if you don't know how much you need to retire, you don't know WHEN you can retire.  

We all know having and sticking to a budget is pretty important.  So how come so few people actually have one, much less stick to one?  Why do most people think "budget" is a four letter word?  Because it's boring.  It's tedious.  It feels restraining.  And lastly - because it's hard.

Wouldn't it be great if there was an easy, even fun way to track your spending and come up with a realistic "spending plan"?  Well now there is!  (cue infomercial jingle)

Yet ANOTHER benefit of being a client of The Financial Zen Group is the ability for you (us) to track your spending in an easy, low maintenance way. 

Here's how:

Step 1) Log into your Financial Zen client portal at www.financialzengroup.com
Step 2) Click "Add" in the lower, left-hand tile of your dashboard
Step 3) Type in the name of your financial institution (banks, credit cards, 401k, etc)
Step 4) Enter your log in information
Step 5) Give yourself a pat on the back.  You are now on the road to financial zen.

The system will automatically start tracking your spending . No guesswork.  No spreadsheets.  No downloading.   It will pull in transactions as far back as your financial institution will let it (usually 12-18 months of data).

Not only that, but it will automatically create a budget for you, based on your spending habits.

If you're like most people, you'll be surprised where your money is going each month.  It's an eye-opening experience.  And most importantly adds a whole new level to our ability to plan for your financial success.

My clients who have already done this have all told me they have never felt more on top of their finances.

So I encourage you to join them and get on your own path to Financial Zen!