In this post I will tell you how you can double your monthly savings, and more. It is not something that you can apply overnight. It requires some work on your side. But it will set you on the fast path to accumulate wealth.
- How to increase your savings if you are already frugal
- What happens once your income has gone up
- Do not fall into the rat race trap!
You may already be a little disappointed. You’ve come here hoping to start saving twice as much tomorrow, and I’ve already told you that’s not possible. But give me a vote of confidence. With this tip you can end up saving several times what you currently save.
Savings is the difference between our income and our expenses. The quickest way to increase our savings is to spend less. It is only logical: if you spend everything you earn, you will have nothing left to save at the end of the month. Which means that if you are currently saving nothing, but would like to, you should focus on your expenses and cut back whatever you do not need.
For the purpose of this post, I will assume you are already doing this. And if you are not, get to it as soon as possible! But again, I am not going to talk about cutting expenses here. We will focus on the mindset needed to accumulate wealth in the medium and long run.
How to increase your savings if you are already frugal
Okay, you are already frugal. You know exactly how much you are going to make each month and how much you are going to spend, and on what things. You even calculate how much you are going to save every year by including your bonuses. Hat off to that. However, you want to save more because you can see that the current pace is not enough to hit your goals.
The next step you should do is obvious. If you can no longer cut expenses, it is time to increase your income. There are several options to achieve that.
For most people the fastest way to do that in the short term is with your current profession. Ask for a raise, work hard, acquire new skills, seek a promotion, or move to a company that will pay you more. Or simply channel your energy to a new venture and go all in.
What happens once your income has gone up
You seem to be on the right track. First, you have made a budget and reduced your expenses. After that you have worked hard on increasing your income and you are finally there. Perhaps it has taken a couple of years to make the progress you had in mind.
The problem is that, in most cases, people get off track precisely at this moment. They have waited for a salary increase for so long that when they get it, they need to celebrate. And it is certainly a positive to celebrate things. But you should avoid falling into the temptation of increasing your standard of living significantly.
When you come to think of it, there are different types of people with no significant savings:
- People who earn little money and must spend everything to live.
- People with average salaries who spend everything to maximize their lifestyle.
- People who earn a lot but also spend everything to maximize their lifestyle.
This is essentially the rat race. Also known as lifestyle inflation. A higher income level is immediately followed by a better car, a bigger house, more expensive holidays, more expensive restaurants, etc. None of those things makes us happier, but we have been programmed to operate like this.
Do not fall into the rat race trap!
If you manage to avoid the rat race, you will be able to increase your wealth very significantly. Let us look at it with example numbers so you realize how powerful it is to understand that. As you will realize, the savings level can increase much faster than the income level.
- Current situation:
- Income: $2,000
- Expenses: $1,600
- Savings: $400 (20% of your income)
- A year later you get a salary increase. But you do not fall into the rat race. You want to gain freedom, not settling for small conveniences today but greater luxuries later.
- Income: $2,500 (+25%)
- Expenses: $1,600
- Savings: $900 (36% of your income)
- With a 25% salary increase, your monthly savings rate almost doubled, and the actual savings level more than doubled
- The following year, you get another salary increase. But again you prioritize freedom and savings over short-term consumption:
- Income: $3,100 (+24%)
- Expenses: $1,600
- Savings: $1,500 (48% of your income)
- Your salary has gone up by just over 50% in 2 years but you just multiplied your monthly savings by almost 4
- Finally, the following year you receive an important promotion. Because you now have more responsibility and have to work longer hours, you are willing to spend a bit more to make up for it. But you do not lose focus of your important goals:
- Income: $4,000 (+29%)
- Expenses: $2,000
- Savings: $2,000 (50% of your income)
- Your salary has gone up by 100% and even though your spending has increased by 25%, your monthly savings has increased by a whopping 400%. Imagine if your income continues to increase but you keep your lifestyle flat.
As you have seen, we have been able to double our monthly salary. We have also been able to improve our lifestyle in the process. But, most importantly, we are now saving 5 times as much as before. This means that we can save in a month what we could save over 5 months earlier.
If you have goals related to certain wealth levels, you are now making progress 5 times faster than before. You should continue to work hard to increase your income further and the rate at which your wealth grows will go up exponentially.
Our example has made plenty of assumptions. But it was just an example. There are two important takeaways from it.
First, it is very important to work hard to make more money. You already stand out by simply wanting to improve your personal finances, and you can use that ambition to increase your income. Remember that you will never save your way into wealth.
Second, once you have reached a higher income level, you do not lose sight of what you want to achieve. If financial freedom is your goal, the best thing you can do is falling into the rat race.
Our time is limited. Time is much more important than money. And we should be able to manage both assets in an optimal way. If we invest time today, we will be able to make more money and use that money to save even more time in the future. And, in addition to time, you will also enjoy more options in life.
Obviously, as you start to make and accumulate money, it is important to invest it wisely. The following post will teach you how to build a diversified portfolio:
Build a Diversified Portfolio with ETF
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