An ongoing debate in my household has always been whether you can become rich by saving. The answer can be yes, no or depends. First of all it depends on one’s meaning of savings.
To some, savings equates to putting away 10% of their gross monthly income consistently while to others savings is simply any amount left over after paying their bills and indulging. My perspective has always been a general one, and one that many have recommended I share through my blog. So here are my two cents on the topic from a 50,000 foot general overview.
In my opinion, saving is definitely a good practice and part of any financially responsible individual’s routine (it should be at least). One should always have an emergency, or a “rainy day” fund stashed away. I usually recommend this be 6 months of living expenses. That said, you cannot become rich by saving money alone.
I agree that the best approach to investing is one of long term. I believe (and it is proven) that investing over a long period of time is the road to slow and steady wealth. But that is for later when you start to enjoy your golden years. Many of the tax deferred investment vehicles like the 401(k) and IRA do not allow withdrawals before retirement age (not without hefty penalties at least).
While saving will help you stash away cash for your long term objectives, it does very little in the short term as far as becoming rich is concerned. Think about this for a minute. Sure you can save $100 on car insurance, a few bucks on groceries, your phone bill, etc. But what happens when the car breaks down? What about life’s demands such as marriage, social activities with friends, kids, college, etc?
Sure, some more savings in the bank account can make you a bit more comfortable than you currently are, but if you want more, you will have to do more. Many people think the solution is to take up a second job. This is actually the worst thing you can do. Sure it will bring in some quick bucks, but at the end of the day, the money stops coming in when you stop working. All you are really doing is trading your spare hours for dollars. This will make you miserable over time.
Again, this is just my opinion, but the best approach to riches is to first plug in all the holes in your bucket. Imagine your life like a bucket of water, with the water being your finances and the holes as your expenses such as rent, heat, electricity, water, etc. The first step to riches is to plug in those holes. In other words, bring some discipline into your life by living responsibly and not spending excessively. Save where you can and get that bucket in good shape.
Once the holes are shut, you will be able to retain more water (money) into the bucket (your life). The problem most people face is that the water flow is too slow. Most people work 9 to 5 JOBS which translate to a fixed amount of income every month. The last I checked the average income of a household in America is in the $40,000 range. So you can just imagine how slow that water must be flowing. And for those that make more money, they cannot seem to control their spending, which washes away a lot of that income. So what to do?
Engage yourself on the side (while maintaining your JOB) with activities that you are passionate about. One thing I realized early in life is that you can’t do the same things again and again and expect different results each time. That routine is defined in the dictionary as “Stupid”. So when the water is flowing really slow, simply turn on another faucet, and then another, and then one more if you want to. In other words, turn your spare time into cash by establishing a part time business doing what you enjoy doing.
This is what I call multiple streams of income. Or in my particular case, I call this multiple streams of internet income. I started with one website, and then a newsletter, then a blog, then another website, then yet another one, then sold one, then started a new one. You see the pattern? I did all this while maintaining a full time job. Each one piggy back’s off the other and together they result in a wonderful compounding effect.
I know of many people who are doing this in different ways. A goof friend of mine started with one Subway franchise and now owns 4. Similarly, another friend of mine who is a school teacher spends summers investing in real estate. Today at the age of 36 he has 12 properties all paid off. Although I will NEVER do exactly that, it shows that anyone can make it happen in any way.
I know several others who have kept their jobs all their careers but have continued to save and invest their spare cash over time in rental properties, the stock market and various small businesses. All of these individuals are financially well off thanks to their decision to take action. Today they are all well diversified and their investments bring in a healthy amount of passive and residual income each month. They all enjoy a very “rich” life.
The key take away here is that you have to take proactive action to build additional streams of income. You will simply not become rich by saving alone. It might after 50 years of slavery and working for someone else, but in very rare cases. And even then, what’s a 70 year old to do with all that money?
While saving is a good practice, it alone won’t make you rich by itself. You must not only save, but also increase your avenues of revenue. This is the best way to riches in my opinion. It’s safe, steady and totally under control. Realize that if you want to change your financial outcome, then you will have to change what you do and how you do it. Watching the latest season of the Bachelorette on Thursdays and the Bachelor on Fridays just won’t cut it.
Readers: Can you become rich by saving?
Here are my thoughts on saving vs. investing, where you can read of one way one can become rich by saving over time.
Turning Faucets On