In this article I will explain how saving money is like getting a pay rise. This is general financial advice only, before you make a financial decision you should seek the advice of a professional.
The more money you save the higher you income will be.
How does this work?
I will explain with an example.
Imagine that you earn $70,000 a year which is $50,000 a year after tax.
Imagine if you had a home with a mortgage on it. The home is worth $400,000 and the mortgage is $300,000.
The interest rate on that mortgage is 5% a year so in one year the interest will be $15,000.
Over time you pay the mortgage down to $200,000. Then your interest will be $10,000.
This saves you $5000 a year.
You might say “yes that saves me $5,000 a year, but my salary is still $70,000 a year? What’s your point?”
You see, to earn an extra $5000 a year from your job, you will need to make about an extra $10,000 a year before tax! So just by paying down your mortgage you have effectively given yourself a pay rise to $80,000 a year now!
See what I mean?
Here’s another example comparing two people so it’s easier to understand.
Let’s take two people named Bob and Mike.
Bob earns $100,000 per year which is about $70,000 after tax.
Mike earns $70,000 per year which is about $50,000 after tax.
Bob didn’t have savings when he bought his house and has borrowed almost the whole amount so he has $400,000 in debt which on a 5% interest is charging him $20,000 a year in interest.
Mike also had no savings and is in the exact same position.
Over the next 10 years, bob pays the minimum principle and interest repayment and his mortgage is now $300,000 charging him $15,000 in interest.
Mike paid a lot more than his minimum repayment and now his mortgage is $200,000 charging him $10,000 a year.
Let’s say their incomes stayed the same (In today’s value) what will their incomes be now?
Bob saves an extra $5000 a year now so effectively his income is $110,000.
Mike saves $10,000 a year! So now his income is effectively $90,000! He’s catching up to Bob and he didn’t even get a pay rise at work!
Over time Mike pays off his mortgage before Bob saving him $20,000 a year!
HE OWNS HIS OWN HOME SO NOW HIS INCOME IS EFFECTIVLY $100,000 A YEAR COMPARED TO SOMEONE WHO HAS ZERO NET WORTH AND EARNS $100,000! EVEN THOUGH HE IS ON $70,000.
Do you see what I mean now?
Even If someone has no savings and didn’t buy a house that means that need to rent and pay $20,000 a year in rent. So deduct $40,000 from their annual salary because after tax that’s $20,000.
If a person doesn’t want to buy a house and wants to rent, they still need to save and invest in something like shares, bonds or property to get that 5% in rent or dividends to pay for their rent forever.
So this is why I think most people should try to be worth around $500,000 (or whatever the average house cost in your area) as soon as possible.
You will save so much in interest and also you will increase your income.
A great analogy for how to manage your wealth is like a plane flight, the first part of the journey you go full power and climb as fast as you can (18-30/40 years old) then you cruise and can spend a lot more after you own your own home (40-60) then later you retire and spend your wealth and maybe give it to your kids or something (the plane decreases in altitude and lands) I will write more on this in another article.
But I just think it’s a great idea to build your wealth up to about $500,000 as soon as you can when you’re younger so you pay way less interest and eventually no interest/rent.
Read a relevant article I wrote here HOW A HIGH INCOME SAVES TIME
But still enjoy your life because you only live once, go on that annual holiday or do those things you really want to do now.
But try to PAY EXTRA on your mortgage. Remember to pay off the highest interest debts first if you have other loans or credit cards.
Then later your life will be easier and you will effectively be on a high income compared to someone who never saved.
You could have an easier job but still it will be like you are earning as much as your manager without the headaches.
Or you could strive for a higher paying job while you have no debts and it will elevate you to wealth a lot quicker! This will be like a fighter jet taking off!
Ok guys I hope you now understand and have this perspective, if you need help just comment below and I will explain more.