We have all heard the saying defense wins championships right? But does this also hold true in the world of personal finance?
For this analogy let’s look at it this way: your earnings are your offensive power and your savings, or more specifically, your savings rate is your defense.
Many people aspire to have a high powered offense. They want to become high-income earners and live an affluent lifestyle. People are drawn in by the money and excitement of a high earning career. They want to dance around defenders and score goals at will. But what happens when you get scored on just as frequently as you put pucks in the net?
High-income earners often put pucks in the net with ease but they never back check. They never play defense. At best the score is tied and at worst they are down a few goals in debt. While it seems all well and great to have the high powered offense, when it comes to playoff time they often come up short. It doesn’t matter how much you make if you spend every penny, the only, I REPEAT THE ONLY, way to increase your net worth is through saving and investing.
Reducing expenses helps you twofold. On the one hand, if your expenses are less you are able to save more money. On the other hand. the lower your expenses are, the less money you need to save and the less passive income you need to earn in order to reach FI. Using the 4% rule, if you reduce your expenses by $1,000, not only do you have an extra $1,000 to invest but you also need to save $25,000 less to reach FI.
Here is where defense comes into play to help you win. If you play great defense you only need to score 1 goal to win the game, it might be tight but you’ll come out ahead. The best part about this is that if you learn to win 1-0 and then you learn to score more goals, your margin of victory will increase. The greater your savings rate the faster you will grow wealth, income helps but nothing beats good defense. Not to mention if you can establish a solid savings rate now, as your income increases you can level up your savings by the same amount. This allows you to grow your wealth with greater intensity and win that FI championship faster.
Mr. Buffet once said “If you don’t learn to make money while you sleep, you will work until you die.” One of the easiest ways to earn passive income is through interest and dividends on your investments. The best way to grow your investments is to have a high savings rate.
When you are just starting out, try focusing on cutting expenses and increasing your savings. These two factors are the key to financial success, only once these are mastered can you truly reach financial independence. All the earnings in the world won’t get you there unless you learn to control your spending. Focus on Defense first!