Whenever I’m talking about personal finances with my friends, a topic that always comes up is how much money we should be saving.
Fundamentally, everyone knows that they should be saving at least some portion of their earnings every year. But life is also meant for a living, and the money you make is supposed to be used to help you to experience that. So how do you find the balance between the two and arrive at a figure that works for your situation?
My belief is that this really comes down to three important questions.
1) What are Your Goals?
What is it that you want to do with your money? For example, some people might read FIRE (financially independent retired early) blogs and think to themselves how wonderful it would be to never have to work again. In that case, their goal would be to save as much money as possible so that they could live off it for the rest of their lives.
However, someone else with no plans to stop working anytime soon might not value saving money the same. Instead, they may prefer to enjoy the money now and use it to travel or for other purposes.
2) What are Your Needs?
Everyone lives very different lives, and I totally respect that. While one person might be happy living off of $50,000 per year, someone else might need $200,000 per year to cover all of their living expenses. I’m not here to judge.
What’s important is that you recognize your needs and cover them appropriately. While it’s important to save towards your goals, there’s also no sense in sacrificing unnecessarily just for the sake of saving. Be real with yourself.
3) What Else Could You Be Doing with Your Money?
While saving money is a good step towards building wealth, it’s certainly not the only way. I can tell you that if I hadn’t started my nurse practitioner business all those years ago, my net worth wouldn’t be anywhere near where it is today.
This is why I always encourage our community to think beyond conventional wisdom. Saving your money is good when you don’t know what else to do. However, if you’ve got opportunities to invest in real estate or start your own business, then go that route instead. As entrepreneurs and investors, we owe it to ourselves to maximize the potential return on investment from the earnings we’ve worked so hard for.
