invest and save

How to Invest and Save Until it Hurts

Reading Time: 6 minutes

As you work to grow your saving and investments in pursuit of financial independence, it can be difficult to know if you’re doing enough. Sure, you’ve created a great monthly budget that you stick to religiously. You’ve assembled an investment plan that outlines a combination of pre-tax and after-tax investing. Awesome. But, how can you know if you’re doing enough?

Here’s a simple rule that’s worked well for me.

“Invest and Save Until it Hurts”

When you’re really focusing on wealth creation, your current savings rate should give you a bit of heartburn. If it doesn’t, you may have fallen into the common trap of simply doing what’s comfortable. It’s much easier to adopt the “good enough” approach than to consistently make sacrifices to get ahead. Remember, the sage words of Zig Ziglar.

“The enemy of the best is not the worst. The enemy of the best is the “good enough”.

 Let’s talk about some ways to actually implement an “invest and save until it hurts” strategy.

“The enemy of the best is not the worst. The enemy of the best is the “good enough”.

Treat Investments Like an Annual “Bill”

For most people investing is a voluntary process. This fact makes it very easy to do just enough to make us feel good about ourselves but not quite enough to make substantial progress.  If you’ve read any of my other articles, you know I’m a big fan of a savings rate of at least 35%.  The traditional advice of saving 10% of your income is bad for your long-term wealth.

The majority of Americans are offered access to either a 401k or 403b retirement account from their employer. For 2018, the contribution limits for these accounts is $18,500. For the HSA, it’s $6,900.  The current 2018 IRA limit is $5,500.

Based on the inflation index, it’s quite possible these limits will increase next year by $500 to $19,000 for 401k and 403b accounts. The HSA is likely to go up by $100 to $7,000.

Calculating Your Annual “Bill”

For the purposes of this discussion, I’m assuming that you have access to an HSA. If you don’t and your family is fairly healthy, it could be worth changing to a HDHP (High Deductible Health Plan)  in order to gain access to one. The benefits are simply awesome. So, if we add the 2018 contribution limits for these three accounts – IRA, HSA and 401k, you end up with an annual “pay yourself bill” of $30,900.

That amounts to $2,575 dollars you need to come up with each month to fully take advantage of these programs. And take advantage of them you should since they allow you grow your investments on a tax deferred basis. You also get the immediate benefit of lowering your taxable income for this calendar year.

Annual retirement account contributions are very much “use it or lose it”.  Once this tax year is gone, you lose the ability to make contributions for it. This should be great motivation to fully fund these accounts. Viewing the contributions as an annual bill that you can’t get out of is a good mindset to adopt. It will help you realize the importance of sacrificing to meet your investment goals.

Motivation to Increase Your Productivity

When you allocate at least 35% of your income towards saving and investments, it’s likely to cramp your lifestyle a bit. For most, it’s going to mean fewer vacations, reduced dining out and less disposable income for toys. I don’t imagine that this is the way most of you are going to want to live on a long-term basis.  What’s the solution?

Work on increasing your productivity of course! The more money you earn, the easier it is to invest and save. Because we’ve already established that 35% savings and investment rate is our minimum, living on the remaining 65% in a way most people desire is going to require an income increase. On your journey towards building wealth, you’ll want to enjoy life without feeling like you’re stealing from your future.

In my article on the best way to get rid of student loan debt, I cover 7 great productivity hacks that will help you boost your earning potential. Eliminating time wasters and starting a business are among suggestions that made the list. Looking for ways to increase your income through being more productive also has the side effect of automatically scaling how much money you’re setting aside for wealth creation. A win-win in my book.

Put Your Investments on Autopilot

 In my guide on getting started with stock market investing, I stress the importance of consistency. The truth of the matter is most of us are bad at taking consistent action. A great way to counter this tendency is to put your investments on autopilot.

One of the biggest advantages of using mutual funds is they allow you to perform dollar-cost averaging investing automatically. Dollar-cost averaging is an investment technique that in a nutshell means you that you buy your investments in steady amounts over time. Most people adopting this approach invest whenever they get paid. This is in contrast to lump-sum investing where you irregularly purchase investments all at once.

By using mutual funds, you can configure your brokerage account so that it automatically invests in the mutual funds specified on the same day you get paid. Because you never really saw the money, it’s harder for you to miss it. You simply specify the dollar amount, bank account details and tell your broker how you want the money allocated across your investments. They take it from there. I personally use Vanguard and Fidelity for my mutual fund investing but Blackrock, Schwab and other brokerages have similar automatic investment programs.

Putting your investments on autopilot is a simple hack that will force consistency into your investing. Whenever you receive a raise, be sure to increase the dollar amount in order to maintain a 35% or better investment and savings rate.

Putting your investments on autopilot is a simple hack that will force consistency into your investing.

How Many Toys Do You Really Need?

The more you earn, the more you can potentially play. You may be surprised to find that as your income increases, your desire to spend it will also likely diminish. Truth be known, you can only have so many toys before they start creating unwanted work. Take my Focus RS for example. I really enjoy tuning and driving it. That said, when it breaks, it costs me in both time and money to resolve whatever the issue is.

As you get more free cash, my advice would be to limit the number areas that you choose to indulge yourself. That way you’ll still get a measure of enjoyment without creating a second or third job for yourself. Time is more valuable than money so make sure you guard it carefully.

Tying it Together

The way to make wealth creation foolproof is to put good systems in place that don’t require constant effort from you. The less you have to regularly do, the more likely you are to stick with the program long-term. 

Saving and investing until it hurts is a lot like starting a new exercise program. At first, you’re constantly sore and your body protests. If you stick with it long enough though, it becomes so important that you can’t imagine your life without it.

Wealth creation is the same way. It’s far easier to be irresponsible and spend everything you earn and then some. If you make the decision to walk the path less taken, you’ll eventually start to really embrace the process. Much like being in good physical shape, above average levels of saving and investing will be something you’ll derive joy from.

If you make the decision to walk the path less taken, you’ll eventually start to really embrace the process.

What are some other ways you can think of to increase your saving and investments?  Let me know in the comments below!

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