The Wealth Formula:The matter of savings is one of the most neglected concerns in finance. What percentage of your income are you able to save?
The question “what’s the best investment right now?” is one of the most common inquiries I receive. It would be like asking a chef what the finest ingredient is at the moment. It depends entirely on your appetite.
The markets, live prices, multiple displays with intricate charts, and the allure of substantial gains have been lauded. All of this, in my experience, attracts individuals who are not able to save all that much and want to make their limited savings work as hard as possible. They desire 10x returns and are willing to risk everything to achieve it.
People have genuinely laughed at me when I’ve stated that a 6% return on a safe asset that requires no maintenance is an extremely compelling proposition. In retrospect, however, it was not those with a large amount of savings to invest who sneered; it is typically those with a smaller amount of savings who seek unrealistically large returns.
The issue of income is one that I have not observed the finance industry address. But for us at IFG, from the standpoint of our mission to elevate the Muslim community in particular, it is of the utmost importance.
Because of this, our organisation has given lectures on career planning across the country for years, the majority of them unfilmed and before we could even be considered a “organisation” (!). However, I did locate one video of Ibrahim from roughly four years ago in the archives.
Before you can even consider investments, your income level is crucial. In this article, I will delve into the data and explain why your income level should be your primary concern. Then, I will offer some practical suggestions for increasing your income level. We will conclude by discussing a target savings percentage and how to achieve it.
The Wealth Formula: Income x Savings Rate = Wealth
How much can you then save?
If the answer is “barely anything,” there are typically one or both of the following issues at play:
• you are overspending; and/or
• you do not earn enough money.
The elder generation likes to convince us that our problem is simply excessive spending. If you recall the infamous viral article, it stated that we COULD all save for a down payment on a house if we gave up avocados and costly coffees.
In actuality, it simply is not true. Even if the elder generation refuses to acknowledge it, it is objectively true that most households have a difficult time saving a significant amount of money each month.
Buying generic beans instead of branded ones will only assist to a limited extent. The greatest potential lies primarily in (2) – increasing your income.
There is a very intriguing paper from the year 2000 titled “Do the rich save more?” One of the major findings is that higher-income individuals save more money.
When wealthy people fill the airwaves with trite ideas about being frugal, investing well, and subsequently becoming wealthy, they frequently neglect their own story. Investing wisely can certainly lead to financial success, but the capital necessary for investment can only come from a high income.
The Life’s Cheat code
Life’s cheat code is that items only cost a certain amount.
Nobody stops you at the grocery store entrance to verify your bank account. Therefore, whether you are a multimillionaire or surviving month-to-month with no savings, you will be doing similar grocery shopping, filling your vehicle with petrol, paying your bills, etc.
Certainly, a wealthy person can afford a few luxuries. If they find something they desire on the shelve, they do not hesitate. And they likely acquire a finer automobile (though not necessarily) and a nicer residence. And the children likely attend a private school and take more costly vacations.
However, in the broader scheme of things, how much does this cost in addition? Rich people’s expenses are not necessarily much higher than those of those living month-to-month unless they are incredibly frivolous and spend excessively every day.
What is the end result? The wealthy individual has more remaining funds at the conclusion of every month, whereas the poor individual has no remaining funds.
According to OECD data, the average household saving rate in the United Kingdom is 6.9%. The data for households with a higher income will reveal a larger rate of savings. Moreover, because you are dealing with larger numbers for high-income households, the numbers involved are also larger.
How can income be increased?
Now that it has been established that households with higher incomes save more, can invest more, and can become wealthy with the correct moves, the question is how to increase income.
If you are youthful and have yet to enter the workforce, I offer three pieces of advice:
- Investigate occupations with high earning potential:These could be relatively “modern” fields, such as artificial intelligence, software engineering, and data science, or extremely well-trodden ones, such as law and medicine. But keep the future in mind as well – some career paths pay well in the beginning, but reach a pay ceiling quite quickly. If you are talented enough to reach the top of your profession, you should be able to earn at least $500,000 or more. Obviously, this will not happen overnight, but you should reach $100,000 relatively rapidly and then be well on your way.
- Be extremely purposeful in your extracurricular activities. I believe there are two major areas of leverage that everyone should consider. The first is an enterprise of some sort. Whether it’s starting something young with the intention of growing it and then making it your entire focus, or if it’s something you can build and then passively generate income from, business is a fantastic way to achieve high income levels. Consider your personal brand and create content to promote yourself. It makes you a significantly more valuable asset.
- Spend money on yourself: Utilise your early earnings to improve your skills. Investing modest sums of money in the stock market and other investments does not warrant concern. Even if it is successful, it will not change your existence. I am aware that a 1000x return on a small investment can alter your life, but let’s work with probabilities and not let a gambling mentality determine your future.
If you are mature and more established, perhaps in a career with limited advancement opportunities:
- Consider the aforementioned alternative disciplines to which you could transition. Consider honing your skills in one in-demand area, such as SEO, digital marketing, web development, etc., so that you can create a one-person agency. This is very realistic, places you in the realm of doing business (albeit as a self-employed individual), and gives you the ability to increase your income over time (e.g., by charging more) or even create a business by expanding the agency and hiring additional staff.
- If your industry is prosperous but your company is not, you should play the field. If you have other viable options to pursue, don’t be hesitant to inform your employer that your current salary is insufficient.
What can be done with greater savings?
If you are saving a significant portion of your income, which I would define as 20% or more, you are now in a position where you must determine what to do with your money.
There are three ways in which I consider this:
• My family’s standard of living: Money is a tool, and as a Muslim man, I am obligated to provide for and secure my family.
According to Abu Mas’ud, the Prophet, peace and blessings be upon him, stated, “If a Muslim spends on his family seeking reward from Allah, it is charity for him.”
We shouldn’t be miserly when it comes to our family, and if there is an opportunity to do something the kids or your partner wishes to do that will make them happy, I make the aforementioned intention, and we do it (within reason). I also make an effort to be proactive in this regard, spending money, for instance, to make my wife’s life more convenient. For example, if she is too exhausted to cook, I will order food in (or cook myself).
• Investments in dynamic entities:You can invest in either something that requires your labour or something that is managed by someone else. As part of our Muslim Mogul video, Ibrahim and I recently invested in a business. Given our active involvement with the property’s proprietor, this is a highly active investment. Generally, active investments yield higher returns, but there is a limit to how many you can make. Another example would be purchasing a business, managing a real estate portfolio, or constructing something yourself.
• Investments in inanimate objects: The majority of my extra cash goes into this receptacle. I ensure that I have a diverse portfolio and that I understand why I’m investing in something. My objectives are written down, and I am aware of which funds I can afford to close up and which funds must remain liquid. Obviously, I invest in some of Cur8 Capital’s own products, and I also administer my own stock portfolio.
If you are currently saving less than 20% of your income, your priority should be to increase your income before you contemplate investing.
When you increase your income, you will see significant increases in your wealth. Not only in terms of your bank account balance, but also your mindset. With a larger surplus of capital, you can engage in a wider variety of investments with varying risk profiles. And the more high-risk investments you can make safely, the greater the likelihood of this compounding effect occurring.