It’s Not How Much You Make, It’s How Much You Keep

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Savings - It's Not How Much You Make, It's How Much You KeepAs I was going through college, I had my mind set on getting rich.  I envisioned a good job that paid a ton of dough.  After all, the more money you make, the richer you are, right?  Fresh out of college though, I wasn’t building savings, I was chasing the money to have and to spend in the present day.

And I did alright.  While I was still in school, I was working at Walmart.  I started out with it being a quick part-time job to working my way up to an assistant store manager.  It paid pretty good for a college kid – in fact, it paid pretty good for a career in general.  I was ahead of most of the kids my age, which for some reason, I always tended to think is important … I know, horrible, right?

Regardless, that job took up a lot of time.  I was working at least a good 50 hours a week while going to school part-time.  And then one day, I actually did the math.  Although I was making good money, at the end of the day, my hourly wage was horrendous.  It also had nothing to do with my major – Computer Information Systems.

So I left and got a job in IT as a Systems Engineer.  I started out part-time while I finished school and then went to full-time.  After a number of years, I was promoted to the engineers’ manager, which is where I am today.  I make a pretty decent salary right now, but for years, I missed the point.  I was aiming for more income and not focused enough on savings.

Wealth isn’t about how much money you make – wealth is about how much money you save.

Think about it, what good is making a lot of money if you aren’t keeping any of it?  Sure, you can live it up in the present day, but once you’re done working, whether it’s because you want to or because you’re forced to, you’re going to be broke as a joke.

One of the blogs I like to follow is that of Jim Collins.  He’s been financially independent since 1989 so he’s definitely worth listening to.  He’s also been a guest on a number of podcasts.  The other day, I was listening to him on one of Paula’s Afford Anything podcasts.  One of the things he was talking about was your savings rate and I think he put it in the most straightforward way:

It’s not how much you make, it’s how much you keep.

In other words, your savings rate is more important than how much income you make.  We all know people who like to flash their giant house or expensive sports car or their $1,000 suits.  And some of these people may actually have the wealth to back it up.  But more often than not, those that are showing off their expensive goods, make good money but spend all – and sometimes more – money than they make.  Be sure to read The Millionaire Next Door if you’re not sure you believe that.

Don’t think that I’m saying that high incomes are bad – in fact it’s just the opposite.  I would highly encourage each and every one of you to build yourself up to as high of an income as you can.  And the earlier you can do it the better.

You don’t need to waste your money on keeping up with the Joneses.  Save your money to put yourself on the path to financial freedom.

The idea is pretty simple, the more you save, the faster you can clear your way to financial independence.  If you’re building up your savings by a large percent – let’s say 50% of your income – you’re actually paving your way to freedom in two ways.

  1. You’re obviously building a foundation for yourself.  The more you save, the bigger your nest egg is.  And the sooner you start saving, the longer you have for compounding to work its magic.
  2. The biggest financial irony of all occurs.  The more you are saving out of every paycheck, the less you are living off of. Think about that one for a second.  If you’re making $50,000 and saving 50% of your savings, that actually means you’re only living off of $25,000.  So when you’re trying to figure out how much money you need to retire, you’re total income becomes less relevant.  The more money you save, the less money you’re living off of, which means less money you need.  Pretty cool, right?

Now, 50% of your income is just an example of savings.  Some might be able to do less and some more.  The key is to do as much as you can and to increase it whenever possible.  Right now, we save about 35% of what we make.  With my wife working part-time at a non-profit (those rarely pay much!) and us raising a child, I don’t think that’s too bad.  However, I’m working to push that number up higher by cutting unnecessary expenses left and right.

I have two big financial pushes that I want to ingrain in my 6-year old daughter as she gets older:

  1. Save at least 50% of your income and one day you will never have to worry about money.
  2. Build up passive income as early as possible.  Don’t work for money – have your money work for you.

These are the same messages I would encourage anyone aiming to reach financial freedom to follow.

High income jobs don’t make you rich – your savings rate is what makes you rich.  How is your savings rate?

Thanks for reading!!

— Jim

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22 thoughts on “It’s Not How Much You Make, It’s How Much You Keep”

  1. Well said, Jim. Many people have this backwards which is part of the problem with our culture. Instead it seems folks focus on what they make and how much *stuff* they can buy with it, all they while their net worth is $0 or negative. Glad you learned this young and got on the right path. Jim Collins is a good role model!

    I started saving early as well and made it a habit. My net worth has grown significantly as a result and now there is no looking back! Thanks for the great post.

    1. Jim Collins is great because he definitely keeps it simple. You can always venture into other avenues, but if you stick with his message, you’re bound to come out ahead.

      Nice job on starting early – I didn’t start as early as I should have, but I’ve made a strong comeback and you can be sure my daughter will be on the right track as well! 🙂

      — Jim

  2. Back in my full-time working years, my savings rate was pretty high. Maybe around 1/3 of my income. I would max out the tax deferred options, then save in my brokerage account. It really worked out well as the brokerage account can fund the period between my full time retirement this year (49 years old) and the magic 59.5 years old. Diversity of account type is as important as diversity of investments!

    Great post!


  3. Hey Jim. Our savings rate last year was an impressive 66% (of take home pay. After tax, that is). I don’t think we can top that and so far in 2016 we’re hovering around 60%, which is still great.

    There are days I’m still doubting some of our choices, maybe we’re a bit too hard on ourselves on the savings level, especially since we’ve not seen a significant increase in our money over the past 10 months (due to our target being in Japanese Yen, and the usd/jpy pair tanking 20% over the past 10 months, we’re barely breaking even this year despite saving a lot)

    But I think that’s the name of the game, if it was easy everybody would do it, right? I also hope to be able to teach these principles you mention, to my kids. If they start saving in their twenties, they have a chance at retiring even earlier than me!

    1. Wow, 66% is fantastic!! Sure, there are always going to be years when you’re not going to see a good increase. I guess that’s the risk vs reward factor. You could always stuff the money in a regular bank account and not make enough to cover inflation, but who wants that?! 🙂 Hopefully, things will turn around on that for you.

      That’s awesome on the kids, too – I wish I had those principles instilled on me when I was younger!!

      — Jim

  4. Perfect Jim! I’ve always said this, even before I heard of Jim Collins.

    Saving is far easier, and completely under our control.

    Climbing up the income ladder is hard in the corporate world — the guys already there don’t want to give up their high paying jobs! Most of us won’t become executives, nor will we “hit it rich” building our own business. The odds are against it.

    1. That’s a good point about the “royal” executive positions being not available to the masses. Best you can do is find a job that pays a lot or build a business that gives you good returns and save as much as you can.

      — Jim

  5. 50% is a really good goal, but you would have to make good income to accomplish that. You should add making good income to your list. 🙂
    It is possible to save 50% even when you don’t make much money, but you can’t do it for the long haul. Cost of living goes up and everyone wants to be more comfortable as they get older. Good luck to both of us with the kids.

    1. That’s definitely a good point, Joe… I do have a good income recommendation in my article on The Steps to Wealth, but I should have probably put it in this post as well.

      I know you mentioned previously that you and Mrs. RB40 save 50% of your income even after you retired. We’ll definitely need to see how we can do on this as our kids grow older. We both might want to figure out what Stockbeard is doing (earlier in the comments here) – he’s saving 60-66% with kids! Super impressive!!

      — Jim

  6. Great point that it’s more about what you save instead of what you make. I wish I had some percentage guidelines to use/follow when I was younger. For now, all I can do is work to improve my current situation.

    One thing I’ve come across is the variations on “savings rate” as a metric. I’m not sure how I will calculate it, but I know that when we focus on specific metrics, they tend to improve. So it’s less about how I calculate it and more important that I just track something.

    1. Excellent point that you have to let go of the past and just focus on the present.

      As far as the savings rate metric, it’s definitely good to track it, but the real meat is just doing it. And the more I’ve found ways to increase that amount over time, the more I’ve realized just how valuable compound interest comes into play.

      — Jim

  7. I can relate to this post on all levels. I used to define myself by my salary but quickly realized it meant nothing if I was not saving my money. I recently had a wake up call and stepped up my savings game. Great post!

  8. Nice post Jim, I love the Millionaire Next Door – it has so many good examples of the premise of your article.

    Like you say, someone who earns $50K and saves $25k is doing better than someone who earns $100k and saves $10k.

    We live in a high cost of living area, and we’re living as happily frugal as we can, so we need to increase our income from here. We certainly do want our money to work for us as hard as it can, we’ve started that process – now for many years of it!


    1. It’s always tough to figure it out when you live in an area with a high cost of living. Hopefully you’re making a high salary as well to help make up for that and can sock some it away rather than letting it all go to expenses.

      — Jim

  9. I was always good at saving it just seemed that for awhile everytime I got to a certain number the truck would break or something like that and really deplete my savings. But I got past that and the last 10 years in the military really saved a lot. Can’t save as much now but I do a little . I save up enough to throw a little in the stock market every now and then now that I am debt free

  10. Hi Jim,

    This is my first visit to your blog. Nice post! What you say is absolutely true – it is not what make the matters, it is what you get to keep.

    The key is to live within one’s means first and start the journey of increasing your savings as you go. If a person doesn’t learn this, the higher their salary, the higher their borrowing capacity, and thus people end up with higher debt if they haven’t learned the lesson of living within their means.

    We have been debt free for several years now and save about ~30% of our family income.


    1. Thanks for coming by, Michael!

      Nice job on the 30% savings rate! Your points about borrowing capacity are well-taken. I know a number of people with increasing salaries who continue to dig themselves into a pit instead of using that money toward their financial future.

      — Jim

  11. Good post. I started saving and investing when I was young and did not earn much. It conditioned me to want to save more. I had a nice nest egg started before I began my professional career. It was a foundation to build upon.

    1. Thanks, Dave and that’s awesome that you started early! Wish I had built up a nice egg when before I started my career! 🙂 Sounds like you’re on your way to FI – good luck to you!!

      — Jim

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