Save Thousands With Passive Saving — 3 Ways To Do It and How It Differs From Being Frugal
How do you save for the short term and build long-term wealth? In order to set yourself up for a brighter financial future, GOBankingRates spoke with Andrew Lokenauth, founder of Fluent in Finance, about four key strategies to passively save for the future.
David Frederick, director of client success and advice at First Bank, also shared how passive saving differs from frugality and how making choices factors into smart passive saving decisions.
What Is Passive Saving?
Passing saving might sound new, but it’s actually a pretty old-school financial concept.
“Passive saving is saving without having to actively manage it,” Lokenauth said.
Once you start viewing money as a tool, you can start using money resourcefully to build wealth.
Strategies To Passively Save For the Future
Passive savings isn’t setting aside a certain amount from a paycheck. Rather, passive saving is money that passes by or that you might not have had otherwise through an outlet such as a second income stream.
Here are three great ways to begin passively saving for the future.
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Invest In Index Funds
In 2021, legendary investor and Berkshire Hathaway CEO Warren Buffett offered short lessons to new investors during the annual Berkshire Hathaway meeting. Rather than stock pick, Buffett said invest in a low-cost index fund. His recommendation was investing in an S&P 500 index fund.
Why? These types of funds hold 500 of the largest companies in the United States across 11 industries. An S&P 500 index fund is Buffett’s preference to hold over a 30-year period. Upon his death, Buffett’s trustee in charge of his estate has even been instructed to invest 90% of his money into the S&P 500.
Investing in the S&P 500 is easy and stress-free for the majority of Americans. Think of it less as betting on a single company, and instead the S&P lets you bet on 500 companies and utilize the power of compounding interest.
“According to historical records, the average annual return since the S&P 500’s inception in 1926 through today is around 11%, per year,” Lokenauth said.
Let’s say you invest $10,000 in an S&P 500 fund this year. What happens next?
“If you invested $10,000 in an S&P index fund, and contributed $10,000 a year for 20 years, you would have invested a total of $210,000 cash,” Lokenauth said.
Now, factor in compounded interest. Watch your investment substantially grow.
“Over 20 years this amount — $210,000 — would have grown to $793,274.56 based on the S&P 500’s historical records of an 11% rate of return compounded annually!” Lokenauth said.
Own Real Estate
Instead of renting, passively save for the future by owning real estate.
Buying has several benefits beyond renting. (When you rent, your money is used solely to provide shelter.) Owning real estate allows you to put your monthly payments toward the following wealth-building areas.
- Building equity in the residence that you can use in the future
- Building additional equity over time through price appreciation in the property
- Leveraging equity in the home to take out loans
- Renting a room or floor in your residence — this generates money passively and allows you to save it.
“You should consider buying a home if you have the cash available for a down payment,” Lokenauth said. “First-time homeowners may purchase a property with as little as 3.5% down or 0% down if you served in the military.”
Get a Side Hustle
In the era of the gig economy, it has never been easier to start or pick up a side hustle for extra income. Side hustles can be any gig from walking dogs to driving a ride-share to delivering groceries.
Look into signing up on apps or websites that allow you to work on your own schedule. (Bonus: many side hustles may also be done remotely!)
One example of a side hustle growing in demand worldwide is becoming an online English teacher.
“You are able to set your own schedule, and most opportunities are with elementary school students,” Lokenauth said. “The only requirements are primarily basic English fluency and a computer, or tablet, and smartphone.”
Is Passive Saving the Same as Being Frugal?
The answer is no, not substantially.
“The big difference between passive savings and frugality is that there is often pain in being frugal, going without some desired consumption. But there should be no pain in passive savings,” Frederick said.
Frederick uses the example of shopping for carrots at Whole Foods. A passive saver asks if the carrots at Whole Foods are really better than the carrots at the local supermarket or whether they are just more expensive.
“From this modest example, passive savings grows and extends to all manner of consumer choices,” Frederick said. “Indeed, if done right, passive savers should notice no substantial difference in their lifestyle, just an increase in the amount of savings socked away.”
How Do I Start Passive Saving Now?
Start living passively by creating a budget.
“Not having a budget can make it difficult to know where you are spending your money, or difficult to have control over your spending in general,” Lokenauth said.
You can get started by looking at old credit card and debit card statements. This gives you an idea of where your money is being spent. As you understand where your money is going, you can better visualize where you may begin cutting back spending.
Then begin passive saving by spending less. This may be done by spending less than what you earn and living below your means.
“If you prioritize your spending, you can focus on saving passively, and spending your hard earned money on what is important to you in life,” Lokenauth said.
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