Did you know that it takes 40 gallons of maple sap to make a single gallon of maple syrup? As a New Englander, I’m required to know this fact. I’ve tried sap straight from the maple tree and it’s light, watery and decidedly non-delicious. In order to make perfect syrup, you have to boil away all the filler until you’re left with that one part out of forty that is essential.
If only the same could be done to financial literature. The average finance book or retirement planning article could withstand a little boiling. Surely the ratio of content to filler is, if not 40:1, then close to it.
What would happen if we boiled down personal financial as far as we could? What kind of rich, sugary center would we find?
Let’s boil out the complicated tax strategies and the stock tricks. Even the spaghetti of tax-advantaged accounts: the 401(k)’s, the Roth IRAs, the 457. Let it all vaporize. Then filter out inflation with a cheesecloth. What are we left with that is absolutely essential?
Spend less than you earn.
This is the maple syrup of personal finance. All other financial concepts depend on this for their inherent sweetness. Like all base ingredients, it is both simple and profound. By looking at only this rule, we can learn a lot about retirement savings without confusing the issue.
Let’s pretend we save 1% of our salaries and spend 99% each year. By this math, we’ll have a year of expenses saved up every ninety-nine years if we keep our spending steady. That won’t quite work, will it? What if we use credit cards and spend 105% of our income each year, saving less than zero? That’s even worse.
But what if we saved 50% and spent the other 50% of our salaries each year. Few people do this, but it isn’t unheard of. Theoretically, we’d buy ourselves a year of freedom for each year we work.
Most people live somewhere between the 50% and the 1% savers (unfortunately, most are closer to 1%). A 25% saver gets a year of financial freedom every 4 years.
At this point you may protest with any of the following: inflation means that you’re being overly generous; investment returns mean that you’re not being generous enough; you won’t spend as much in retirement as when you’re working, so your ratio makes no sense; you’re not considering retirement accounts and careful tax planning?
You’d be right to protest, because you’re correct. Proper investments supercharge your savings, giving you more years of financial freedom. Inflation eats away at your money over time, stealing a few years. Spending less in retirement adds years. Medical emergencies take. Proper use of tax advantaged accounts give the average person a great boost in their savings.
Like I said, none of these statements are wrong, just inessential. It’s the watery sap diluting our boiled down truth of financial planning.
Spend less than you earn.
I’m not the first to say this (or the thousandth), but if you can’t follow this rule, all the financial tricks in the world are useless. Build your life around this fact. Create automatic processes to enforce it. Start early. Learn all the other parts of finance too, but remember that they exist in service of this cardinal rule.
Call it your Grade A Financial Syrup. It goes great with everything.