Saving & Investing Your Way to Financial Freedom

The road to financial freedom is different for everyone, but there are core concepts that everyone should be familiar with. Saving requires arduous work, which requires planning, commitment, discipline. Investing requires putting your savings to work in a smart manner. I believe that reminding yourself from time to time that these concepts are the foundation to your future financial freedom.

4 Concepts to Saving & Investing

In this article, we’re going to discuss 4 important concepts pertaining to the relationship of saving and investing.

Key Concept 1 – Focus On What You Can Control

We have much more control over our ability to save as opposed to the results of our investing.

Every one of us can find at least one cost in which we can reduce, or a way to earn a little extra cash. These are controllable ways in which we can increase our savings.

On the contrary, returns from our investments are frequently beyond our control. Stocks can stay at the same level for long periods of time. These factors may be determined by macroeconomics, market sentiment, sheer luck, or other unknown factors. Even with good practices, good returns are NOT a sure thing.

This means that we must devote most of our thinking toward how we increase our savings, as opposed to what will happen with our investments. We know that in the long run, our investments will pay off.

Key Concept 2 – Saving Is Mandatory

Savings is the ‘fuel’ necessary for our investing. Without it, there no investing.

It’s quite simple:

• We take our savings and put it into our diversified portfolio.
• Following good practices, the value of our portfolio will rise over time.
• As the portfolio continues to grow, we continue to add more of our savings to it.

The concept is simple, without savings, there is not investing.

So, we must save, continue contributing to our portfolio, our portfolio will continue to grow, and eventually we’ll reach financial freedom. The concept is quite simple, yet it takes your relentless committed discipline, and patience.

Key Concept 3 – Time Matters

Saving and Investing work in opposite time frames. Earlier in your life, saving matters more, and as time passes, investing plays an increasingly significant role.

Consider Kelly, a new college graduate. Kelly has $0 money saved, but she just received her first job with a tech giant, and now she’s earning $150,000 a year. From this, she’s able to save and invest $50,000 a year. So, at the end of the year, she is now worth $50,000.

Let’s pretend that Kelly invests that money and earns 10% / year. How much is she worth at the end of Year 2? During Year 2, her investment will earn her $5,000 and she will save an additional $50,000 – so now she will worth:

Year 1 Savings Invested	$50,000
Year 2 Savings Invested	$50,000
Year 2 Investment Earnings	$5,000
End of Year 2 Total	$105,000

Notice something? Where is most of Kelly’s money coming from? SAVINGS.

This is what happens early and that’s why savings matter much more early on and the investing matters much more later.

To Illustrate this, let’s say Kelly continues this same path.

• $50,000 Savings every year.
• Add this $50,000 of savings to her portfolio each year.
• 10% Portfolio growth every year.

Eventually, Kelly’s investment gains will be the bulk of the portfolio growth as opposed to the savings investment.

Here’s what it looks like over 40 years.

This chart depicts the overall growth of the portfolio over time and is broken into total savings dollars (GREEN) and total interest dollars (BLUE). You can see that early on, most of the money is savings (GREEN), and then at the end of Year 13, they are almost exactly equal. From that point on, the interest will grow at a significantly higher rate. Thus, early SAVINGS dominates; later INVESTMENT dominates.

Key Concept 4 Everyone Has Different Financial Goals – Know What Yours Are

How can we achieve financial freedom based on our goals? It is critical for you to understand what financial freedom means personally to you. Some might say that they want to retire at age 50 with $5M in savings. Another person might wish to retire at age 70 with $10M. Everyone has a different objective in this sense. But figuring out your personal criteria and setting goals is relatively easy.

Let’s look at a few more examples:

$7.5M in 30 Years

Right now, we’re worth $200,000. We want to have $7,500,000 in 30 years. This is our “goal.”

To achieve this goal, we look at the following questions:

1. How much should we save each year?
2. At what rate of return (% increase) should we expect to grow?

Let’s suppose we can SAVE $35,000 a year; every year and our portfolio will grow at 10% every year from Investing. As you can see, we will reach our goal in 28 years, actually 2 years earlier than we expected.

But we’re a little worried that 10% might be too much to expect each year, and we feel like we can do a better job saving and add more into investments.  So, we want to be a little more conservative in our approach, and save a little bit more, and reduce our expectations of our average growth. We decide to save $50,000 per year and expect to earn 8% yearly.

This is almost exactly the amount we need to save to reach our goal of $7,500,000 in 30 Years with our current savings of $200,000.

We know that there is some combination of Saving and Investing that will grant us our financial freedom and others that will not. Take the time to understand what your specific goals are, and then figure out how you can achieve those goals.

Small incremental steps can be the pathway to achieve goals, and if you aren’t currently meeting those goals, you can find the path that will get you there. Patience, motivation, focus, and determination will help you achieve your long-term goals to financial freedom!

Conclusion

Remember, everyone has their own expectations and goals as to what financial freedom may mean. But it’s important to understand the 4 concepts above laid out in this article. The markets can be rocky at times and the only thing that we have control over is our ability to save and invest. Without savings, there is no possibility of investments, and this takes self-control and discipline over long periods of time. The earlier that you’re able to start saving and investing, the more you’ll be rewarded later in life through compounding interest. Having an understanding of your goal allows you to set small incremental goals, which in turn will get you to where you ultimately want to be – financially free!

• Focus on what you control
• Save & Invest
• Starting earlier which allows for compound growth
• Know what your goals are

I hope these concepts and visualizations help you further understand what it takes to reach your financial goals. Feel free to ask any questions or offer your own insights into saving and investing.

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