The other day I was talking to a University of Colorado Boulder (CU) professor who is nearing retirement. When she stops working, she won’t have financial worry because of her tremendous job building up her CU retirement plan as well as her properties, most of which she owns outright. While she is well paid by the university, her savings far exceed what you would expect given her earning history.
“So what is your secret?” I asked. “How did you build up such wealth on a professor’s income?” She replied that she believed she had very little to do with her financial success. Instead she credited the primary CU retirement plan for professors, known as a 401(a) retirement plan. With this plan, professors must contribute 5% of their pay; CU kicks in double that amount. Over time, this translates into a retirement balance that will provide a comfortable standard of living.
Her story is a testament to the power of regular, mandatory savings. While public sector retirement plans tend to be generous, salaries tend to be lower as well. Even with private employment you can still use one of the single most important secrets to financial independence. To build wealth over a lifetime, make your savings automatic and regular. If that’s a challenge, focus then on making your spending mindful and intentional. (For related reading, see: Why Playing it Safe Could Hurt Your Retirement.)
The Easiest Way to Save
The easiest way to make your savings automatic is to put 15% of your pay into a 401(k) or other type of retirement plan. You can include the employer match in this savings rate. In other words, you will achieve your goal if you contribute 12% of your salary and work matches the first 3%. If you start saving in your 30s or earlier and invest in a target retirement fund that corresponds with your goals, then you should achieve your financial independence at a reasonable age.
You may find that you reach the 401(k) contribution maximum with this approach, which is $18,000 a year ($24,000 for those age 50 and over). If that’s the case, you can get to the 15% of salary level by monthly contributions to a taxable investment account.
If this level of saving would shock your monthly budget, make incremental improvements. Start with saving enough to maximize your employer match. In the example above, that would mean 3% of salary would go into your 401(k) matched by 3% from your employer. Then, every time you get a cost of living increase or raise, bump up your 401(k) contribution by at least half of the amount of your increase. This should get you to 15% within a few years with little budgetary hardship. (For more, see: 5 Financial Strategies to Last a Lifetime.)
If you find your budget can’t accommodate this lower level of savings, you need to watch your spending more closely (and perhaps find better paid employment). This is when you need to make spending intentional, rather than automatic. Often I see people have signed up to have all of their bills paid in full automatically, and they never review them or consider whether their spending matches their priorities. If you are not able to save enough for the future, consider removing the convenience of automatic bill payment. Write the checks or authorize the online bill paying every month.
If that doesn’t reduce your spending enough, reduce your use of credit cards and consider paying with a debit card, check, or cash. We are more likely to think twice about the impulse buy if we must stop and think if we have enough cash or checking account balance. By making your saving automatic and (if needed) your spending intentional, you can achieve financial independence and the freedom to spend your time as you desire far earlier than average. (For more, see: How to Use Your Credit and Debit Cards Safely.)