The Power of Robust Savings
Posted on . 2 min read
Welcome to the second discussion. The second most important pillar in building long-term financial wealth and achieving financial independence is savings. Robust savings will put you on a path to financial freedom faster than you can imagine. If you are an American, I urge you to set your minimum savings rate so that you can at least save $22,500.
Why that number? That's the maximum amount you can put into your pre-tax 401(k) as mandated by the government for the year 2023. If you're not able to do that, go back to the previous discussion, watch that, and increase your earnings so you can save at least $22,500. If you are earning decently, I would encourage you to treat saving as your first expense. Before you do anything else—before you pay your mortgage, your credit cards, anything else—put savings aside. That's why a pre-tax 401(k) is critical; the money is taken directly from your paycheck and deposited.
If your employer offers an ESPP, which stands for Employee Share Purchase Plan, you can actually contribute 15% of your pre-tax income into the ESPP plan. Even though ESPP is post-tax, it forces you to save. This is a very good way to increase your savings because that money never hits your checking or savings account; you can't spend it because it doesn't even come to you. It's automatically saved, and that's the best way to save money that is already stashed away.
If you can do more, consider a Roth 401(k) or a Roth IRA on your own, contributing $6,500 per person. If you still have more, invest in your own brokerage account. I challenge you to save 40 to 50% of your income. If you're making more than $250,000, aim to save about 60% of your income. I've done it; at my peak earning years, I was saving about 75 to 80% of our income.
Good luck increasing your savings and improving your chances of reaching financial independence soon.