I have written a few posts lately to convince you to increase your savings rate.
Increasing your savings rate is the easiest lever to pull in increasing your net worth. To do that, I mostly suggest increasing your income:
- My Second Lesson in Personal Finance
- How Programmers Can Beat the Market
- Beating the Market Addendum: Taxes
If you increase your income and mostly save it, that effect will compound on itself and with the market. The end result is significant.
But, surely there’s a downside, right?
When you save money, you are forgoing whatever benefit you could have by spending it now. That spending could be considered investment or consumption.
If the spending is truly an investment, then I think it’s worth considering. I am not talking about Bitcoin or $TSLA, I am talking about
- Books in your industry
- A course
- Equipment (a laptop, a smart phone, a cricut) if treated like factory equipment
- A conference
A lot of this stuff is deductible against business income (see my taxes post). If you could deduct it, then I’d say it qualifies as investment or a worthwhile expense. I’d also extend this to serious hobbies and fitness. Of course, you need to keep it in line with your income.
In spending that is for consumption, I would follow Ramit Sethi’s advice to spend on things you love and cut mercilessly everywhere else. Also, he says to ask the $xx,000 questions (e.g. saving on a mortgage) and not the $x dollar question (e.g. lattes).
Spending that is an investment pays off in some way over and over. This doesn’t need to be money. If you spend on fitness, your improved health gives you benefits. If you learn an instrument, you will get enjoyment from playing for the rest of your life.
Consumption is more about enjoyment in the present. You absolutely should do that, but this is where you need to be careful as we’re built to value short-term pleasure (see The Pleasure Trap book or watch the TEDx talk).
Having money in the bank is good, but ultimately, you do need to spend it to get any benefit. But, please don’t use that as an excuse to waste money.