The Basics Series Part 3 of 5
Saving is a fundamental part of reaching Financial Independence.
Fortunately, I think educators are in a great position to increase their savings.
Why do I think that?
A key component of saving is keeping your expenses low, and educators are already pretty good at that.
We chose this profession out of passion, not to make a ton of money. So living frugally and finding enjoyment in the little things was expected and comes second nature to us.
Additionally, unlike many corporate jobs, teachers don’t have social workplace pressure to drive a fancy car, wear a fancy suit, or purchase the latest tech gadgets.
That creates the perfect foundation to spend less and save more.
This post will focus on the basics of savings. The topics discussed in this post include:
- What is Savings?
- Savings Rate
- Why is saving important?
- Savings for educators with a pension
- Saving for the short term and long term
- Top 5 Strategies for spending less and saving more
Let’s jump in.
What is Savings?
The key to building wealth as a teacher is earning more than you spend and investing the rest.
The money that you use to invest comes from your savings.
The simple way of defining savings is earnings – your spending = savings.
Looking at this formula, you can increase your savings by
- Increasing your earnings
- Decreasing your spending
- Doing both at the same time.
Since Millennial Educator is all about maximizing finances, we’re aiming for number 3!
The amount that you are able to save is most commonly expressed as a percentage, known as your savings rate.
Although there is some debate on which factors influence savings rate, the most simplistic method for calculating savings rate is by dividing your savings by your earnings. (If you contribute to a pre-tax retirement account like a 403b you will add those contributions to your savings number.)
For example if you earn $50,000/yr, and save $10,000/yr, then your savings rate is 20%. (10,000 / 50,000 x 100)
Your savings rate should be a reflection of your short term and long term financial goals. It is also the most common measurement tool for calculating how many years until reaching your financial independence number.
All teachers on the path to Financial Independence should aim for a high savings rate.
Why is saving important?
The money you invest comes from your savings.
So the more you can save means the more you can invest, and investing expedites your path to Financial Independence.
Now I’m not saying that all savings should go to investing.
It’s important to also build up an emergency fund from your savings. This is money that you have readily available to cover unexpected costs such as the loss of a job, car repairs, etc..
The amount that you allocate toward your emergency fund is up to you, but a safe estimate is anywhere from $5,000 – $15,000.
Having an emergency fund will help you to stay on track with your financial goals without going into debt.
Why do I need savings if I’m a teacher with a pension?
If you are lucky enough to have access to a pension, fantastic!
The amount of Americans who have access to a pension is diminishing, so having access to one is becoming a rarity.
My advice to those who have access to a pension is to save like you’re pension doesn’t exist.
I say this for a few reasons.
- The pensions of today are usually less lucrative than those of the past
- There are a greater amount of stipulations in order to receive full pension benefits
- You must work for a longer period of time.
If you are relying on your pension as your sole source of savings, in most cases you would be forced to work 30+ years in order to see a full pension benefit.
If you end up working those 30+ years and love every second of it, then great! I’m not saying that a pension is bad. In fact it’s a wonderful bonus at the end of a long career for many happy teachers.
What I’m saying though is to not rely on it. Don’t let the pension be the reason you work.
Millennial Educator is about expanding your choices and taking control of your finances early on in life.
Pensions do not give you flexibility and choices. Increasing your own earnings, saving, and investing provides that.
If you have access to a pension I recommend taking the time to research the in’s and out’s of what benefits are available are to you.
Also, here’s some further information about including a pension in your savings plan.
Saving for the short term and long term
Where you save will be different depending on when you plan to access your money.
Money that is needed in the short term should be in an account where your money can be accessed quickly.
Money that is not needed in the short term should be invested to maximize the power of compound interest.
For example- someone saving money for the short term may choose to keep their money in a bank savings account, whereas someone saving money for retirement might invest their money in a stock market index fund.
For more on this check out part 5 of 5 of the Basics Series – Investing: The Basics for Teachers.
5 Strategies for Spending Less and Saving More
1. Get Rid of Debt
According to Debt.org, in 2019 consumer debt in the United States approached 14 trillion, mortgage debt rose to 9.4 trillion, automobile debt hit 1.3 trillion, and student loan debt was at 1.4 trillion.
Needless to say, Americans have a habit of buying stuff now and paying it off later.
Going into debt is normalized in our society, and it’s a major reason why saving is so difficult for many.
As stated earlier, to increase your savings you need to either increase your earnings or decrease your spending.
When a large portion of your spending each month goes toward paying off debt, it is very difficult to save.
So it’s simple, if you pay off debt and avoid any future debt you can increase your savings.
2. Make a Budget
Budgeting is tracking your expenditures and setting clearly defined spending goals for yourself.
It’s the process of knowing where your money is going and how much money is coming in and out.
A budget is a great tool for
1) Keeping you accountable for your spending
2) Making sure you have money for the things that you really value.
3) Getting out of debt and/or staying out of debt.
3. Automate Savings
Automated deposits for long term and short term saving is a great way to keep you accountable.
Life get’s busy, and it’s easy for us to lose track of how much we are saving each month. Automating your savings takes the guess work out of the equation.
For longterm retirement saving, automate payroll deductions from your paycheck into your tax advantaged retirement accounts.
For short term savings, setup automatic deposits from your checking account into your savings account.
If you are an avid spender, this can also help to reduce the money you have available for meaningless spending. It will guarantee that you pay yourself first before paying someone else!
4. Avoid Lifestyle Inflation
Lifestyle inflation is when your spending increases in relation to your income. Basically you spend more as you earn more.
Those that fall victim to lifestyle inflation view a raise at work as an opportunity to spend more.
Don’t be that person!
Instead, view an increase in income as an opportunity to increase your short term and long term savings.
Avoid any temptation by saving your income increases as soon as you get them.
Over time, you will continually be increasing your savings rate!
5. Delayed Buying
This is one of my favorite strategies since it always amazes me how well it works.
Delayed buying is as simple as it sounds. Before you buy something, force yourself to wait at least one day before making the purchase.
During that one day, assess the value that the purchase will bring to your life.
If by the next day, you still feel just as strongly about making the purchase than do it.
You’d be surprised how many purchases are done on impulse.
There are SO many pointless amazon purchases I would have made over the years if it hadn’t been for delayed buying. Don’t get me wrong, I still make stupid purchases every time and again, but delayed buying has definitely saved me hundreds of dollars.
It’s a super powerful and simple way to reduce your spending and increase the amount you have to save.
The Bottom Line
Saving more money is fundamental to reaching Financial Independence.
Teachers are in a great position to increase their savings.
You can increase your saving by increasing your income, decreasing your spending, or doing both.
Continue on to Part 4 of 5 in the Basics Series – Destroying Debt: The Basics for Teachers.