In Don Phillips’ article “The Things You Can Control ” he suggests that the best advisors help their clients focus on what can be controlled and not fret about the the rest even when when uncontrollable things are what clients think are the most important. His second suggestion is:
2. Get clients to become committed savers. It’s not enough for clients to start to live within their means; they must commit to staying with that program and increasing the amount they save over time. Increasing savings’ percentage as salary rises, limiting debt, and paying the mortgage off early are all ways to up clients’ savings game over time. Good advisors improve their savings patterns
Saving is the most fundamental component of wealth management. Wealth is what you save, not what you spend. Capital is defined as deferred consumption because you have to defer consuming wealth in order to have capital. And it is especially important to squirrel away money while you are young. Your future self deserves to be happy and if you are not saving for your future happiness, you are borrowing from yourself.
But saving money is not enough. You need to save and invest.
Stock investments appreciate at a rate of about 6.5% above inflation. At 7%, your investments should be doubling every ten years. At 10%, your investments should be doubling every seven years. That means that every six to ten years that you delay saving and investing you cut in half the lifestyle you will have in retirement. Time in the markets matters more than timing the markets. Slow and steady wins the race.
Much of the wealth inequality in America is the result of the difference between those few with a future-oriented mindset who save and invest and the masses with a present-oriented mindset who spend everything they earn and don’t even have a $1,000 emergency fund.
Regarding limiting debt and paying off your mortgage early, we are of two minds. For those with a saver’s heart and a millionaire mentality, it is better to pay off some debts such as student loans or your mortgage as slowly as possible. The interest rate on some types of debt is lower than the rate of appreciation of a wisely-crafted portfolio, so for those who would not spend their savings, it is better to let your savings outpace the interest on your debt. But for those with a spender’s heart, it is better to be debt-free.
For our clients we compute a safe savings rate and then create a investment plan along the efficient frontier. For non-clients who have the time and expertise, we help them automate their savings and get started with investing through our annual publication of our gone-fishing portfolios.
We help clients stop telling themselves financial lies about how they can’t save money. We help them pay themselves first and automate the process of savings in a technique we call “The Automatic Millionaire.”
After developing spending discipline so that you won’t spend whatever you have, the surest way to wealth is simply to save.
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