Let Your Kids in On the Secret: The Long-term Investment that Matters Most is Savings
Ryan Guth
Founder & CEO
If you’re a high earner and a good caretaker of your hard-earned money, you’ve no doubt already discovered one of the most important secrets of long-term investing – saving. If you had parents who were good money managers too, perhaps they taught you that saving a percentage of your earnings was essential to your financial well-being.
But have you shared this with your kids? Whether they’re 18 or 28 or 38 or even older, it’s never too soon to chat with them about things such as savings rate and how smart saving will help them not only now but in their retirement years as well.
It’s not unusual for a young person to scoff at the idea of setting aside a sizable chunk of their income each month, but with help from you – and Guth Financial – your kids will be on their way pursuing financial success sooner rather than later.
Give them a good start by talking about these important steps to seeking financial freedom.
Assessing your savings rate
What is your savings rate? Simply put, it’s the amount of money you deduct from your disposable personal income to put aside for the future. (Disposable income is defined as all your sources of income minus the taxes you pay on them.) Essentially, your savings rate represents a choice to put aside current consumption in favor of future consumption. For example, in order to save you might not use your “extra” money to purchase that sailboat you’d really love to own but, rather, put it aside for the things you want or need in the future.
Savings rate isn’t a one-size-fits-all proposition. Individuals or couples must determine the savings rate with which they are comfortable, assisted by guidance from their financial advisor. It’s also important to remember that your savings rate may change as life progresses. As your income increases so does the cost of your lifestyle, so you should re-examine your savings rate periodically.
Here’s why.
Perhaps you’ve been diligent about saving throughout your working life, from the early days when you had barely any cash to spare through the days where your income continued to grow and into the present. At the very beginning, you may have been like most Americans and set your savings rate at about 4 or 5 percent. That’s pretty average. Then perhaps you raised it to 10 percent or more. That’s a great number. Most financial advisors recommend saving a minimum of 10 percent of your income in order to retire comfortably at age 65 or 70. If you want to retire earlier, it’s necessary to be even more aggressive.
As you explain this to your children, they’ll no doubt ask how they can possibly put aside extra money, especially when there doesn’t seem to be a lot of it available at the end of each month. The question remains, however, is there more left at the end of the month than they surmise…and where is it going?
Paying yourself first
One of the most common mistakes earners make, including high earners, is that they calculate their savings rate in a rather backward fashion. Here’s what happens. Most people pay their fixed expenses first, buy whatever extras they desire, and then bank what’s left. So, if you’re earning $10K per month and spending $9.5K, you’re left with only $500 to bank.
That’s not much. However, if you truly want to increase your savings rate and make the most of your extra cash, you’ll pay yourself first.
What does that mean?
Well, it doesn’t just apply to people that are self-employed, as the term might indicate. Paying yourself first means you should focus on funding your long-term needs before any other unnecessary spending.
Think of it this way. Your expenditures fall into one of two categories: mandatory (bills that must be paid, food, medicine, etc.) and discretionary (entertainment, clothing, travel, eating out, streaming accounts, etc.). When you only save what you have left at the end of the month – after using your income for both mandatory and discretionary expenses – you are essentially putting savings into the discretionary category.
If, however, you make savings a mandatory expense, you’re stating that your long-term financial well-being is an important – or the most important – bill to be paid each month. As such, it insures that you’ll have a consistent amount to invest in yourself and saving will no longer be a desire but a necessity.
Getting started
Taking a look at your spending by reviewing your bills, bank statements, and credit card obligations is always a good first step to determining the right savings rate for you. This will allow you to do some simple math to arrive at a comfortable number. Remember, however, this number can go up or down as needed and should be periodically reviewed.
Do you need help calculating your ideal savings rate? Do you require a little extra shove towards the concept of paying yourself first? Let me sit down with you to crunch the numbers and help you understand how to put your long-term needs first. To schedule a consultation, call Guth Financial at 505-404-9970.
Securities offered through SCF Securities, Inc. • Member FINRA/SIPC • Investment advisory services offered through SCF Investment Advisors Inc. • 155 E. Shaw Ave., Suite 102, Fresno, CA 93710 • 800.955.2517 • 559.456.6109 FAX. • Atria Wealth Solutions, Inc. (“Atria”) is not a registered broker-dealer or Registered Investment Advisor and does not provide investment advice. SCF and SCF Investment Advisors, Inc. are subsidiaries of Atria. SCF, Atria, Charles Schwab, and Guth Financial are independently owned and operated.
