I strongly believe in saving and investing.

That’s probably not a surprise to you. You need me to write a post about why you should save money. You already know that.

You have goals and dreams and an eventual plan for your savings. Unfortunately, most of us are not saving as much as we want. Today, I’m going to share an easy hack to help you save more money and become a millionaire.

The best part is, you won’t even feel the pinch!

To Save More Today, You Need to Spend Less

You already track your spending. You’ve cut out anything that’s not meaningful to you and only spend money on your needs and top priorities.

Great!

Unfortunately, that means to save more today, you need to cut spending on one of your top priorities. Hell no! You don’t want to do that. Neither do I. So, let’s ignore that option.

How To Save More Without Spending Less

We all work hard at our jobs. Most of us are lucky enough to earn a raise every year or so. Sometimes, we even earn a bonus! Depending on the economy, your employer’s results and your performance, this increased compensation can be anywhere from disappointing to amazing. Either way, how you use those extra resources is critical to your wealth. This is your chance to get ahead financially. Here’s my recommendation:

Save Half Your Raises

Yup. That’s it. This concept is so simple yet it’s perfectly in line with a winning plan. You get to build your savings every year, but you won’t have to give up any part of your current lifestyle to do so. It’s a win/win. If you’re growing your income at a nice rate, your total dollars saved will go through the roof.

An Easy Hack To Save More Money and Become a Millionaire

Meet Jane – Age 22

Let’s see what this looks like in action. Imagine Jane, a smart and motivated 22 year old that can’t wait to hack it as a marketing professional. She finishes college toward the top of her class and lands herself an entry level job making $50K a year.

Never Pass on Free Money

Her company (like most) offers a company match on 401(k) contributions. They will provide a match for half of the first 6% Jane contributes to a 401(k). Jane’s read enough Winning Personal Finance articles to know that taking the free money from her employer is a no brainer. She sets up her contribution amount to be 6% of her salary on day one at work. This makes her effective contribution $4,500 or 9% of her salary in year one.

Yikes! This Adulting Thing is Expensive

Even though she’s now making more money than she’s ever seen before, life’s not as easy as it seems on paper. Jane still has to live somewhere, put together a business-appropriate wardrobe, oh… and figure out a way to get herself to work. She sets up a budget that includes paying taxes, all of the stuff she needs to live and some money for fun. Saving is great and all, but at 22, having fun is important, too, right?

Save First and Spend the Rest

When she’s done budgeting, Jane realizes she can get by without the 6% going to her 401(k), but can’t save anything else. She’s a little frustrated. She’s been reading FIRE (financial independence; retire early) blogs and wants to retire early. Then she read this article. Yup – the one you’re reading right now – and realizes that everything will be okay if she just saves half of her raises.

Meet Jane Today

Today, Jane is 45. She’s now a VP of Winning for a well-known brand. She received a 5% raise each year in the workforce. She’s now earning $154K. Not bad, right?

In fact, once she turned 32, her savings were above the maximum allowable (in 2018) 401(k) contribution. She had to find another bucket for her savings and contributed the difference to an IRA. Any savings above the IRA maximum went into a taxable investment account.

Her investments grew at exactly 8% per year compounded monthly. [It’s funny how steady and even investment and salary growth happens in blog posts isn’t it?]

Here’s the chart showing all the details.

Jane’s a Millionaire

Jane’s savings are now worth $1,329,723. Yup, she became a millionaire when she turned 43! Isn’t passive income wonderful? If she wanted, she can retire today and live on $53K in current year dollars in perpetuity based on the 4% rule of thumb.

Was She Miserable Scrimping and Saving?

The best part is during this 23-year span, Jane never felt like she was making any sacrifices. She actually inflated her lifestyle a little bit every year. After saving half her raises, some of the remaining portion of her increases went to taxes. She spent the rest guilt-free.

Over time, she eventually moved from a tiny apartment that she shared with two of her friends to a one bedroom place she had all on her own.

She understood the insane cost of constantly driving new cars. In her early 20s, she took public transportation everywhere she needed to go. Eventually, she bought a slightly used, wonderful little car that got great gas mileage.

By the time she’s 45, when her savings rate was at 38.7%, her life was so luxurious it felt like a dream.

Avoiding Lifestyle Inflation is Easier Than Cutting Spending

This is getting wordy so it’s time to wrap it up. Here are the key takeaways:

Cutting spending to increase savings is hard. It means you have to “give up” something you previously thought was worth it.

Most of us (especially those just starting out) can expect to grow our salaries over time.

Committing to saving half of the gross value of all raises limits lifestyle inflation and gradually boosts saving over time.

I did not use bonuses in Jane’s example. The same concept applies to them as a raise. In fact, an argument can be made that you should save even more than 50% of bonuses as you don’t want to inflate your lifestyle with a non-guaranteed income stream.

Following this path is very likely to make you a millionaire.

You don’t have to be 22 for this to work. It can apply to you at any age. If you push Jane’s starting point from 22 to 42, the math works the same and she’d have the $1.3M at the age of 65.

A Personal Anecdote

I did not follow this advice exactly when I was younger, at least not as mathematically perfect as the example. Life has some ebbs and flows after all. I did make sure to apply a portion of all raises to savings and it worked!

Starting early and saving increasing amounts as income grows works. Doing so gave my family the financial flexibility to allow my wife to become a stay at home mom and gave me much more flexibility in my career. If I can do it, so can you.