Save Like a Pro – The Sequence of Savings

Have you ever wondered how some people manage to build incredible wealth while others struggle? It's a question that has puzzled many of us, and it's a topic worth exploring. Recently, I listened to The Algebra of Wealth by Scott Galloway, where he breaks down the process of becoming wealthy into four key factors. While we often look to figures like Warren Buffett, who started investing as a teenager, or Ronald Reed, a janitor who built an $8 million estate, the truth is that their success isn't about luck—it’s about understanding capitalism and leveraging it to your advantage.

Galloway argues that economic security comes from understanding capitalism—not just in theory but in practice. This understanding isn't reserved for the already wealthy; it's accessible to anyone willing to participate in the system through consistent and prudent financial behavior. Let’s go over two of the four factors Galloway highlights: economic security and smart savings strategies.

Economic Security: Achieving Financial Independence

Economic security, or financial independence, is the point at which your passive income exceeds your expenses. This is where you gain control over your life, free from financial stress. Achieving this state isn't about a sudden windfall; it’s about time, consistency, and building an asset base that supports your lifestyle.

A simple formula to follow is the 4% rule: aim to have savings and investments that are 25 times your annual expenses. This might sound daunting, but it starts with a two-step process: earn more than you spend, and then save and invest wisely. It’s not a mystery—it's about setting priorities and sticking to them.

The Sequence of Savings: Maximizing Your Financial Growth

Once you’re earning more than you spend, the question becomes: where should you save first to get the most bang for your buck? Today, we have more savings vehicles available than ever before, which can be both a blessing and a source of confusion. Here’s a breakdown of where to save first and why:

1. Emergency Fund: Start by building an emergency fund that covers six months of expenses. This is your safety net for unexpected events, providing peace of mind.
2. Employer Retirement Plan: If you have access to a 401(k) or 403(b), this should be your next focus. Start contributing as early as possible—ideally, from your first day of work. Even small contributions, made consistently over time, can grow into substantial wealth. Take full advantage of any employer match; it’s essentially free money.
3. Health Savings Account (HSA): HSAs are often overlooked, but they offer a unique trifecta: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for medical expenses. Plus, after age 65, your HSA can function like a retirement account, allowing for withdrawals for non-medical expenses (though those will be taxed). Given that many of us will face significant healthcare costs in retirement, an HSA is a smart place to save.
4. Individual Retirement Account (IRA): Whether you opt for a traditional IRA or a Roth IRA depends on your tax bracket. IRAs offer more investment options and flexibility than employer plans, which can be a significant advantage.
5. After-Tax Investments: If you’ve maxed out the above options and still have discretionary income, consider after-tax investments. Real estate, for example, offers excellent opportunities for passive income and tax advantages.

Consistency and Review: Keys to Building Wealth

Building wealth isn’t a one-time task; it requires ongoing effort. Establish your plan, execute it, and review it regularly. Your financial situation, tax bracket, and even the economy will change over time, so be ready to adapt. Seek advice, stay informed, and remember that building wealth is a journey of consistency, discipline, and smart decision-making.

By following these strategies, you can harness the power of capitalism to achieve financial independence and enjoy the freedom that comes with it.

As always, schedule a complimentary discovery call here with me if you have any questions or are ready to start building your wealth strategies.