Wealth Creation Habits – C.Perpetual Saving

Check the transcript of the video here:

Hi. My name is Maciej Stanek, financial advisor at Véurr. In our series on wealth creation habits, today I will discuss the habit that leads to line C. This line represents the perpetual saver, someone who is afraid to invest or spend. Before I get started, watch the previous videos to understand the graph meanings and what line A and B represent. Line C shows the impact on your wealth if you possess the savings habit. More accurately, for every $10 you earn, you spend nine and save $1. For this particular chart, it is assumed that this $1 is not invested, nor is it earning any interest in a bank account.

People who have this habit have to keep working to grow their wealth. They need other habits to achieve financial freedom. Let me tell you about a client who I worked with early on in my career. This client was a retired doctor in his late sixties. After a long career as a doctor, earning significantly more cash than the majority of Australians, he retired with only two assets, a debt free house, and $1.6 million in the bank account. At this point, most people are probably thinking that this is a really good outcome, yet I felt sorry for this man.

You see, he never invested any money throughout his career. Not only did he not invest in growth assets, but he did not invest in living. His whole life, he worked and he saved. Even with his above average income, he did not go on holidays or even eat nice meals. When I spoke to him, he told me that he’s frugal, predominantly eating baked beans, spaghetti, and bread. He didn’t eat steak, as he said, it cost too much money. He saved this way very early on in his life to buy his first house without needing to borrow money, which was not all bad, as when he was young, interest rates on property loans were in the double digits.

Once he purchased this house, he saved for that possible situation where he may not be able to afford to buy food if he couldn’t work. And therefore focused all his energy on building an emergency fund. He did that until the day he retired. Once he retired, he could not bring himself to spend any of it due to his lifelong saving habit. So he let the money earn interest in an interest-bearing account and lived a life which never cost more than the interest that he earned. This habit is more conducive to wealth creation than that outlined by line A or the financial treadmill outlined by line B. But the psychological ceiling and the fear of losing a single dollar did not create a scenario where this man was financially free.

I’ll also add that this habit is similar for those who only focus on paying off a house. They would also likely be represented by this perpetual saver scenario. These days, it’s unheard of for people to save for a house and purchase without any debt. So the perpetual saving is replaced by excess contributions into a home loan to clear the debt faster. I’m not saying that this habit or strategy is all bad. I reiterate that it is better than having habit A or B. I also agree that having a roof over your head debt free is part of the foundation of being financially free. But it is only the foundation. It is not the whole story.

I also believe that using a combination of wealth creation strategies throughout your life will increase the probability of financial freedom. That’s where a financial advisor can help.

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