When it comes to saving money, most people find every way they can to cut [1] little [2] expenses [3] from their budget. This technique has become known as the Latte Factor. Here, you forego your daily coffee and save the $3. Eventually, all those times of saving $3 add up and when you retire, you have a nice nest egg. Of course, you don’t need to cut out coffee to be involved in the Latte Factor.
Clipping coupons [4] or eating out one less time [5] per month also qualifies you as taking part in the Latte Factor. While this technique works over time, what if you didn’t want to wait for the 40-50 year payoff? If you would rather save up lots of money at a quicker rate, I introduce to you Burst Saving.
Burst Saving Explained
Burst Saving is a fancy name for saving lots of money over a short period of time. To participate in burst saving, you need to save upwards of 35% or more of your income. Some articles may have this percentage lower, but to really see the effects of burst saving, you need to save a lot. The theory behind this technique is to create as large of a savings as possible so that it can compound and grow faster. When you have a large pool of assets that is earning interest, it grows faster than a small pool earning interest. Below is proof.
If we take $1,000 and compound it for 20 years at 5% interest, it grows to just over $2,700. Take $100,000 and grow it by the same interest rate and after 20 years we have about $272,800. You earned over $172,000 in interest.
You may be thinking that is awesome, but how in the world are you going to save $100,000 in a short period of time? Remember, we want to save as much as possible in the shortest amount of time so that we can let it grow. There are a few ways we can go about this. Realize that burst saving does include sacrifice, but it is worth it in the end.
Burst Saving Options
Options for burst saving include living off of one spouse’s salary and saving the other. Cutbacks in spending will need to be made, but this is the best option out there. From there, look at the large expenses in your life. These include housing [6], automobiles and insurance.
If you haven’t refinanced, look into it. Rates are at historic lows [7] right now. For many, you can switch from a 30 year fixed to a 15 year fixed and pay close to same amount each month while saving thousands in interest.
Look at your cars. Do you really need a brand new BMW? Sure you may be able to finance it for 0%, but that is still $40,000 out of pocket. Buy a nice used car for $15,000 and put $25,000 into savings. If you don’t have $25,000 to put into savings, when your auto payment is due take the difference between what the BMW payment would be and what your payment is and move that money to savings.
For insurance coverage, shop around for better prices. Before doing this though, make sure your deductibles are $1,000 for your house and car. Many people have low deductibles which increases their premium. I’ve found that shopping every two years works best for me.
Any windfalls you get, say tax refunds [8], inheritances, lottery winnings [9], etc. should be primarily put to savings. Feel free to take 10% as play money and buy yourself something, but don’t go overboard.
Lastly, find something you love to do as a hobby and see if you can turn it into a business. I really enjoy personal finance, so I turned it into a side business. It doesn’t replace my income from my job (yet), but the money that it brings is viewed by me as my ‘bonus’ each month that goes into savings.
Final Thoughts
Like I said, burst saving does require sacrifices. I have a friend that makes $60,000 per year and has saved close to $500,000 and he is in his mid-thirties. He drives a 10 year old car, bought a house that is big enough for him to enjoy, and is on course to pay the house off in five years. The key is this: he has made sacrifices, but he is still happy. Don’t make so many sacrifices that you begin to hate saving money. Save as much as you can and slowly continue to increase that amount each year. You’ll end up with a nice cushion of assets that will help you afford retirement comfortably.