This One Decision Determines Your Financial Future

Introduction – The One Decision That Changes Everything (0:00)

Bo: Two people, same salary, same job title, same city. They start their careers at the same time and they both work hard for decades. But at age 55, one of them retires with complete financial independence. The other one still working at age 75. Not because they want to, but because they have to. So what was the difference? It wasn’t their income. It was not their investment returns. It wasn’t luck or an inheritance or just timing the market just right. It was one single decision that they made differently and they made it over and over again every single month for their entire career. Guys, I am so excited because today we’re going to talk about what that one decision is and how it can either help you retire early or ruin your financial future.

Your Savings Rate Determines Your Future (0:47)

Bo: The one decision that can make or break your retirement is your savings rate or the percentage of your income that you save and invest every month. This one decision matters more than almost anything else in your financial life. And here’s why. When you’re just getting started on your wealth-building journey, you are doing most of the work by earning your income. Over time, as you save and invest, your army of dollar bills begins to do more of the heavy lifting through compound growth. Your savings rate is the decision that determines the size of your army. And it doesn’t just affect how much money you have when you retire. It determines when you get to retire. Yes, a higher savings rate means you end up wealthier, but it also accelerates the timeline to financial independence.

Manny vs. Allen: Savings Rate Beats Returns (1:30)

Bo: I’ll show you exactly what I mean. Manny the Mutant and Average Allen are both earning $100,000 a year. Average Allen saves 10% of his income and earns an incredible 10% average annual rate of return. Manny the Mutant saves 25% of his income, but earns only a modest 6% average rate of return. Over 30 years, Average Allen, the one who had the better returns but the lower savings rate, builds up an impressive $1.8 million. Manny, however, the one with the lower returns but the higher savings rate, reaches over $2 million. In fact, he crosses the $1 million mark in year 21, which is 4 years earlier than Allen. With his higher savings rate, Manny will reach financial independence faster with more money despite having lower investment returns. And here’s what that shows us. You can outsave a bad rate of return, but you cannot out-return a bad savings rate.

Why Savings Rate Matters Most (2:36)

Bo: I know you. No investment strategy, no matter how sophisticated, can compensate for not saving enough in the first place. The base has to be there for the compounding to do its work. It also shows us how a low savings rate costs you both money and time. If your savings rate is too low, you may have to keep working months or even years past your retirement age. So, every major financial decision you make, from the house you buy to the car you drive to even the vacations you take, is really a retirement timeline decision. You’re choosing today’s comfort or today’s pleasure over tomorrow’s freedom. And it would seem a lot of Americans are doing just that. According to the Federal Reserve, the median amount of retirement account assets for Americans nearing retirement, those that are between ages 55 and 64, is only about $185,000. Using the 4% withdrawal rule, that would provide only $7,400 of annual income in retirement.

The 25% Benchmark (3:33)

Bo: So why do most people not save enough? Well, there’s one big obstacle that keeps most people from increasing their savings rate. But before we get to that, how much should you be saving in the first place? The benchmark we recommend is 25% of your gross income. That number puts most people on a path to real financial independence. If you’re investing 25% for retirement by age 30, it’s likely you could replace almost 120% of your pre-retirement income if you retire at 65. And that’s assuming a 6% annual rate of return. Think about that. That’s literally a pay raise in retirement. Is 25% the right number for you? Well, not necessarily. It depends on your age, your lifestyle, your goals, and where you’re starting from. Someone who starts investing at 22 has a lot more flexibility than someone who waits until 42. If you want to know what you should aim for based on your age, check out our free resource, How Much Should You Save. You can download it now at moneyguy.com/resources.

The Biggest Obstacle: Lack of Financial Margin (4:33)

Bo: I know a lot of you may be thinking, “Yeah, okay, Bo, that’s great, but I’m barely keeping up as it is. How in the world could I possibly invest 25%?” And look, I get it. It sounds like a lot. But there are levers you can pull to help you get to that target savings rate. See, the single biggest thing that keeps people from saving more is a lack of financial margin. That’s the gap between what you earn and what you spend. The Financial Order of Operations tells you what to do with your next dollar. But it only works if you actually have that next dollar or margin. And many people don’t. According to MarketWatch, 57% of Americans say they’re living paycheck to paycheck. Meaning that after all the bills are paid, there’s little to nothing left over.

Creating Margin: Two Levers to Pull (5:15)

Bo: So, how do you create margin? There are two levers you can pull. You can spend less or you can make more. The first lever is a good place to start because for many people, the real culprit is lifestyle creep. Income goes up, lifestyle goes up, savings rate stays the same. We see this all the time. And the best way to avoid this trap is to simply automate your investing. Set up automatic contributions to your 401(k) and your Roth IRA so that the money moves before you even see it in your checking account. What you don’t see, you don’t spend. Another way to keep the expenses lever down is to follow what we like to call the 60/40 rule. When you get any kind of raise or bonus, allocate 60% towards savings and investments while allowing 40% for lifestyle upgrades. It’s a balanced approach that lets you enjoy both the rewards of your hard work while still making progress towards your financial goals.

The Bottom Line (6:06)

Bo: Here’s the bottom line. Your savings rate is the decision that determines your financial future. The percentage of your income that you consistently put to work paycheck after paycheck, month after month, year after year is what separates the person who retires at 55 from the one still working at 75. But here’s the thing. Even if you’re saving 25%, you still need to know which accounts to use and in what order. That’s why we created the Financial Order of Operations, a step-by-step system that tells you exactly what to do with your next dollar. For a deeper dive on the FOO, check out this video to learn more about the wealth-building plan that could change your life. And as always, keep building towards your great big beautiful tomorrow.