Do you want to know how to save more money? What are the obstacles that can prevent you from saving?
In Money: Master the Game, motivational speaker and life coach Tony Robbins provides the key to saving money: spending less and investing more. With this, he explains that you can fast-track your saving progress in just three ways, but you have to avoid the pitfalls that will derail your progress.
Here are Tony Robbins’ tips to save money so you can live a rich lifestyle.
Start Saving Now
It’s never too early to learn how to save more money. You have to decide on a percentage—such as 10%, 15%, or 25%—of your monthly income to save, and “pay yourself” by setting that aside before paying any other bills or other expenses. If you don’t commit to saving a set amount, it’s all too easy to spend it without thinking. This is the principle with which you’ll start investing.
Robbins also recommends saving up an emergency fund before you start investing. To do this, aim to accumulate enough money to cover your basic expenses for at least six to 12 months. (Shortform note: In I Will Teach You to Be Rich, Ramit Sethi suggests leaning on your family to help with emergency funds if yours dwindle too quickly. Alternatively, you can withdraw the principal from your investments, or use a credit card as a last resort.)
You’ll reach your financial goals more quickly by saving more and spending less. The more you save to invest, the faster your investments can compound. Robbins provides several ways to accelerate your savings.
Accelerator #1: Put away more money each month. Robbins recommends doing this by living at or below your means. To cut down on unnecessary costs, make a list of all your expenses and consider which you could reduce or remove. For example, $4 saved daily from a bagel shop habit would compound to roughly $53,000 if invested at 6% returns for 20 years.
(Shortform note: Jacob Lund Fisker of Early Retirement Extreme suggests saving more money than most by living on as little as possible. While he acknowledges that you should consider your happiness when changing your lifestyle, he also encourages trying to live with very little—for example, you might replace your car with an electric bicycle, downsize to a cheap apartment, or learn skills like home repair that enable you to cut costs even further. By doing this, he once reached an 85% monthly savings rate.)
Accelerator #2: Increase your earnings by becoming a more valuable individual. Robbins explains that we’re rewarded for the value that we bring to the market. So if you develop in-demand skills, especially creative thinking and entrepreneurial drive, you can become more valuable in your workplace and secure higher pay. You can also earn more by starting your own business.
Accelerator #3: Pay less in taxes and fees. Robbins recommends staying away from high-fee 401(k)s and other high-fee mutual funds when learning how to save more money. Even a 3% annual fee can significantly hinder your compounding interest, so choose low-fee investments instead. In addition, consider moving: Several U.S. states have no income tax, while living abroad is often cheaper and can enrich your life.
Additionally, avoid pitfalls that derail your progress when saving up money. Robbins explains there are unsavory players who will take advantage of you to line their own pockets. In general, avoid getting sucked into the marketing hype that encourages you to buy into the newest, “hottest,” investments. These mainly profit the brokers, not the investors.
Pitfall #1: Misleading Returns—brokers/firms advertise average annual returns based on a lump sum investment compounded annually. Average returns usually look better on paper, but what you get are actual returns, which depend on your monthly contributions and variation in the market. Take it as a red flag if a firm tries to sell you on average returns.
Pitfall #2: Disadvantageous Products—Robbins explains that many financial products have high fees or disadvantageous terms. In general, avoid any fees over 1% annually. As a rule, avoid mutual funds and invest in low-cost index funds instead. Mutual funds depend on active managers—96% of whom lose to the market over the long term—while index funds mimic the overall growth of the market.
If you’ve invested in a 401(k), annuity, or target-date fund, check whether you’re paying more in fees than you need to be. Many 401(k)s and annuities invest through high-fee mutual funds with poor returns and have low-fee alternatives. Many target-date funds—a mutual fund meant to become more conservatively invested as you age—don’t follow the advertised adjustment curve and do not guarantee good returns.
Pitfall #3: Self-Interested Brokers—Robbins explains that brokers have no legal obligation to put your interests first. Because they work for commissions, they have an incentive to sell you more expensive services—and they often get poor returns while charging you high fees. If they lose, you take the loss. If they win, they profit from your risk.
Pitfall #4: Unpredictable Tax Rates—when investments yield income, you must pay tax on that income. This means whenever you withdraw funds from an investment, as you would in retirement, you pay income tax, which halts your progress in saving more money than spending it.
While we can’t predict future tax rates, Robbins suggests that they may continue to increase and it’ll become harder to save more money then. To avoid paying out higher taxes on your investments, use a Roth IRA and a Roth 401(k). Unlike normal retirement accounts, Roth accounts allow you to pay tax upfront. Each time you contribute, you’ll pay tax—but when you later withdraw funds, when the rate may be higher, you don’t have to pay it again.