Do you know there can be a one-way road to financial success? We bet you don’t, and that’s quite understandable since many people have been made to believe it takes some super rocket science to understand their finances and make them work in their favour. However, on the basic level, it’s not as difficult as it’s purported. In fact, a single habit can change the financial life of anyone who adopts it. Yes! It’s only one habit.
What habit could that be? How powerful is it, and how do you develop it for your financial future? We’ll discuss all these in this blog. So all you need is to sit down, avoid distractions and read this blog to the end.
If financial success is the ability to amass enough wealth to achieve your dreams within your set time frame, then one of the best ways for you to get there is to save. That takes us to the one essential habit for financial success: saving. Of course, you might be expecting something more complex. But it’s that simple. Meanwhile, we are not talking about saving for rainy days. Instead, what saving means here is to save your way to reach your financial dream.
So, how do you do that? Through a strategy known as the safe saving rate. This is simply how much an individual will need to save monthly or yearly towards investment to meet their financial goals within the set time to achieve them.
Let’s clear the air on theories and run some simple arithmetics to analyse what this means in reality.
Suppose Mr Johnson earns a yearly income of 80,000 dollars, and he’s planning to have a hundred thousand dollars saved by the end of the next five years. How much would he need to keep to reach his financial goal? Well, that depends on the returns on the type of investment that he chooses.
Assuming he puts his money in the S&P 500 at a time when the annual return of the index is 13 per cent, then he will need to save around 18,000 dollars of his income every year to meet his saving goals of 100,000 dollars. This is equivalent to 22.4 percent of his yearly income, which is quite impressive. But of course, this is an example of the green days.
Now let’s see the worst-case scenario. At this point, we probably think there will rarely be any market condition worse than the period of the great depression. So, we’ll take the S&P annual rate in 1931 as a case study. The rate at the time was down to around -47 per cent.
In this scenario, for Mr Johnson to still reach his saving goal of 100,000 dollars in the space of five years, he will need to save about 50 per cent of his income, equivalent to around 40,000 dollars a year.
This means that based on the S&P index history, any investor with 80,000 dollars and above yearly income intending to save a hundred thousand dollars in the space of five years can be sure of their financial success if they can save around fifty per cent of their income every single year. Fifty per cent is their safe saving rate.
The same goes for virtually everyone. Once you know your financial goal and the given time frame you want to get there, you’re going to study the history of the type of investment you want to leverage in achieving the financial goal. This allows you to understand the worst-case scenario of returns in that type of investment and plan your saving against just that.
Of course, this example is a little bit extreme. It’s just for the purpose of explanation, as he might not have to save that much if we are realistic. If he extends the time frame by two years to make seven years, he will only need to save around $13,000, which is 16% of his income in the normal scenario. And in the worst-case scenario, he will be saving $28,000, equivalent to 35% of his income, to meet his goal.
The secret idea behind this strategy is that you have more chance of success because you are operating a system that survives even in the worst market situation of your investment. And should things turn around and you have a green market for your investment, then you can achieve your goal faster and even go many times beyond in financial success. This system ensures that you have a win-win situation regardless of your investment performance. If things get rosy, you will get there before the time you projected, and if otherwise, you’ll still be able to reach your financial destination at the right time.
If you love this blog, please support this platform by hitting the like button and sharing it with other people who are serious about their finances. Remember to signup for our newsletter so you don’t miss out on the financial tips and tricks we share on our platform. Check out also these relevant post such as “9 golden rules for financial success“. Before you go, we’ll like to ask you a question. How much do you think you will need to save based on the safe saving rate system to reach your financial goal? Let’s see your answer in the comment section.
Recommended books for further reading:
- The Financial Times Guide to Investing:The Definitive Companion to Investment and the Financial Markets: The Definitive Companion to Investment and the Financial Markets
- Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
- A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
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