Trying to save money to start a business? You’re in good company, both present and past. Studies show the majority of small businesses are funded by the founder’s savings. And you don’t need a ton, relatively speaking, of money. At least one study found that one out of three small businesses get launched with less than $5,000 in startup funds.
But if you’re currently on the downside of this advantage, and struggling to make ends meet, saving $5,000 can seem insurmountable. That’s why many people obsess over the rate of return on their investments: If you’re trying to save $5,000 to start your business, the greater the rate of return, the faster you reach your goal.
But here’s the thing. When you’re trying to save money, your rate of investment return is important—but your rate of savings is everything.
Here’s an example. Say you make $40,000 a year and tuck away 3% of your salary. At the end of the first year, you’ll have saved $1,200. If you earn a 5% return on that money, a year later you’ll have $1,260. If you have a 10% return, you’ll have $1,320.
But if you increase the rate at which you save by 1%, and tuck away 4% of your salary, at the end of the first year you would have $1,600—even if you don’t generate any return at all.
Warren Buffett’s Secret
As of this writing, Warren Buffett is worth $114 billion. Clearly, he knows a thing or two about achieving an incredible rate of return. What’s more instructive, though, is the timeline:
- By age 30, he had amassed a net worth of $1 million. (In today’s dollars, approximately $10 million.) That’s a lot of money, but nothing compared with $114 billion.
- By age 50, Buffett was worth $300 million. Even more impressive, but still $113.7 billion less than he’s currently worth.
- By age 65, Buffett was worth $3 billion. He was clearly rolling, but that’s still $111 billion less than he’s worth today.
Buffett’s secret? The financial advantages of a long life, a high rate of return and, as he wrote, in his 1965 Buffett Partnership letter, “a combination of both (especially recommended by this author).”
Where building savings is concerned, rate of return certainly matters, but its effect doesn’t really snowball until you’ve amassed a considerable sum. Early on, how much you save matters a lot more than how much you earn on your savings.
So, how can you increase your rate of savings? Like most things in life, the answer is simple in concept, albeit difficult in execution.
Start Spending Less
I’ve been there: When your budget is tight, even finding an extra percent in savings is tough.
But, unlike investment returns, you have significantly greater control over your rate of savings. You can decide to eat out a little less. You can join the cable cord-cutters. You can switch to a cheaper cell plan. Shop for cheaper insurance. (A few years ago, we bundled our auto, homeowners and rental property insurance under one provider and saved a total of over $2,000 per year. We should have done that years before.)
You can’t control how much you earn from your investments.
But you can control how much you spend. Think about your long-term goal—in this case, to pull together enough money to start your business—to remind yourself no “sacrifice” is truly a sacrifice if it helps get you where you want to be.
And, although possibly to a lesser extent, you can also control much you earn.
Again, say you make $40,000 a year and save 3% of your salary, or $1,200. Start a side hustle that generates $200 per month after expenses and taxes and if you save the proceeds, you’ll have saved $3,600 after one year. ($1,200 plus $2,400.)
Again: The rate of savings matters a lot more than rate of investment return.
Which proves, in this case, that your time is much better spent finding ways to save and/or make more money than it is trying to eke out a marginally better rate of investment return.
Granted, it might take a few years to pull together the capital you need to start your business, but that’s OK, since the same skills required to bootstrap your way to sufficient startup capital will apply to bootstrapping your startup through its first years of existence.
Because nearly every successful entrepreneur is really, really good at constantly finding ways to cut costs and increase revenue.
Jeff Haden is a keynote speaker, ghostwriter, LinkedIn Top Voice, contributing editor to Inc. and the author of The Motivation Myth: How High Achievers Really Set Themselves Up to Win.