I think the discourse around saving money has often centered around cutting out unnecessary expenses; i.e. cutting out a Starbucks coffee or canceling subscriptions that you barely use. Unfortunately, an extra $50 a month isn’t the difference between achieving financial freedom or being destined to constant poverty. The real difference comes as soon as you are paid.
First, it starts when you get paid. I am going to assume most of my readers are paid via a W2 so I will base my example on this. The number one thing you should focus on when you get paid is maximizing your tax deductions. So what does that look like?
First, it’s going to be an Health Savings Account (HSA)—which is something I’ve written about in the past. However, as a brief review a HSA comes with a high-deductible healthcare plan (HDHP) that you sign up for with your employer. The plan allows you to contribute tax free money to your HSA. Your employer more than likely matches your contributions up to a certain amount as well (basically free money). Your HSA contribution can reduce your tax burden by $3,850 for yourself or $7,750 if your family is also on your health plan.
Another benefit of the HSA is that the money contributed can be invested. Typically, you will contribute a certain amount to the account which will remain in cash, and all the dollars contributed beyond the liquid cash can be invested in the stock market for example. A family investing the max amount in their HSA each year over a 30-year period with a 7% return (provided by investment growth) could have $1,000,000 in HSA dollars. The total cash amount invested would be $322,000 with investment growth accounting for the remaining amount.
You’d have to forgo 200,000 cups of $5 coffee to save $1,000,000. So yeah, thinking that cutting your small expenses just doesn’t make that big of a difference. Additionally, adding contributions to your HSA account (and other tax advantaged accounts) gives you less money to even consider spending on coffee or other unnecessary purchases.
The same principal applies to other tax advantaged accounts such as 401K and 529 (which are not tax deductible on the federal level but are deductible at the state level in some states). Again, I’ve gone into detail on both of these in the past (see links attached to each account). For 401K accounts, you can again reduce your income tax liability by more than $20,000. For a 529 account, if you plan on having a child who will most likely go to college, it makes sense to store away money that will grow tax free while invested. Additionally, some states like Michigan even allow you to use the money from a 529 account to pay for educational expenses before college.
I always think the discourse around cutting out things just doesn’t make any sense. The rich become rich (and stay rich) by working the system rather than cutting out things that make them happy or comfortable. For sure, there’s a large expense difference between buying a Chevy and a BMW, that goes without saying. But it’s not like any rich person (that I know of) refuses to buy a car because there’s an expense attached to it. Instead, they are making smarter decisions with the money they have available, not living with less. Contributing to these accounts, as well as making (smarter) investment and spending decisions are the real way you gain wealth and financial comfortability.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.