Improve Your Net Worth

Increase your savings rate

My personal feeling — and this is a little controversial — my personal feeling is that everyone should aim to invest at least 20% of their income. That includes making additional payments towards a debt above and beyond the minimum required. It includes retirement savings. It includes investments in an investment account. It includes building up your emergency fund. So long as 20% of your income is going towards improving your net worth, then I think that that is a good starting point.

Now, there are some people who are going to disagree with me who are gonna say that 20% is too high. A lot of times in classic traditional personal finance circles, people say to aim for 10%, or aim for 12%, but given the need to build some buffer, I think that 20% is probably a better option for most people, and it’s one that, compounded over time, will give you a lot more flexibility. It will give you a lot more cushioning. It’s gonna be something that over time you’ll be happy that you’ve done.

There are people in the financial independence space who will argue that 20% is too low and they’ll argue, “hey push it up to 30, 40, even as high as 50.” If you’re earning a lot of money, sure you can do that, but don’t be intimidated by the voices on the internet that say, “hey, save half of your income” because the people who can save half of their income are earning so much money that that’s doable, right? If you’re not earning a lot yet, start with a goal of saving 20%, and if you’re nowhere close to that, then the approach that I like to take is to increase your savings rate by one percent. So whatever you’re currently saving let’s say you’re currently saving 3% of your income, increase it by 1%, go from 3% to 4%, and then hold at that for maybe a month or two. And then increase it from 4% to 5%, and then hold at that for another month or two. And then go from five to six. If you continually consistently do that, then it will take a few years, but you will, over time, get to that 20% mark, and it’s okay for it to take a few years, right? This is a lifetime practice. This is not a quick hit. This is not something that’s gonna happen overnight. This is a project that you are going to undertake for the rest of your life. Money management is something that happens for life. It never stops happening.

Harness the “Hierarchy of Savings”

The hierarchy of savings, or the hierarchy of how we direct our savings, refers to the different types of goals and accounts that we use. If you have an employer that gives you a match into a retirement account, contributing enough to get to that match is going to be at the very top of the hierarchy because if you get a dollar for every dollar that you put in, I mean, you immediately double your money risk-free. There is no bigger opportunity than that.

So that’s at the very top of the hierarchy, and a very, very close second is paying off any high-interest debt. So any debt that has a double-digit interest rate, you wanna pay that off immediately. After that then you wanna look at making sure you have at least a basic emergency fund. It doesn’t have to be huge, but having enough of a cash cushion that you could cover at least a month’s worth of expenses, that’s gonna be high on that list as well. And then going to contributing more to your retirement accounts, contributing enough so that the version of yourself that maybe one day might be too ill or too old to be able to work (even if you wanted to), you want to make sure that that future version of you is taken care of.

Beyond that, at that point, a lot of how that hierarchy falls becomes personal choice. If you have a health insurance plan that is health savings account eligible, which you know is available in some countries, there are a lot of advantages to that. There are many reasons why that would also be up there. Contributing to college savings plans, contributing to taxable brokerage accounts, and saving up money for the down payment on a home. There’s a lot of personal choice sort of towards the bottom of the hierarchy, but up at the very, very top: not foregoing any employer match because of the fact that that’s such a big opportunity. That’s up there at the top. And paying off any high-interest debt and making sure that you have at least a basic emergency fund. Those three are right up there at the top.