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Note: This is the third of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed

You can become an entrepreneur and build a company that will generate positive cash flow or you can do it the simple way - by saving a portion of your paycheck.The concept of saving is a simple one, but saving money is in no way simple. I would rather say that

Saving money is simple but it’s not easy

If you are too comfortable to change your spending habits, let me tell you this

Saving money is the only conventional way of getting rich

Other principles of getting rich that are not directly connected with saving money are more difficult to master and require a bigger effort!

Saving is also a universal principle for getting rich - you can save money when running a company, being an employee or still getting money from your parents. The only prerequisite to saving money is that you have an income. However small it might be - there is at least a 99% probability that you can save at least 1 dollar(it’s better than nothing and it kick-starts the habit of saving).

What are the reasons for saving at least 10% of your income?

Keep in mind that 10% is the absolute minimum that you should save. I recommend to set a goal to eventually save 50% of everything you make.

Jim and Chuck

Let me tell you a story about my imaginary friend Jim. Jim is a steel mill worker who gets paid 15 dollars an hour and usually works on average about 10 hours a day.

This makes him 750 dollars per week, 3000 a month and 36 000 dollars a year.

Since Jim is an avid reader of the blog Psychology of Money he took my advice and saves 10% of what he makes. This is  exactly 300 dollars every month. By the time he has saved for 10 months he has 3000 dollars - the same as his monthly salary. Let’s also assume that Jim is a bit of a fruitcake and decides to stack all his saved money inside a box under his bed. At this rate it takes Jim exactly 10 years to collect 36 000 dollars - his yearly salary.

If Jim were to double his savings and put aside 20% of his income or 600 dollars a month it would take him 5 years to save 36 000 dollars.

Now let’s take a look at Chuck.

Chuck is Jim’s co-worker and makes exactly as much. In addition to being extremely good with roundhouse kicks he took a personal finance class during his sophomore year at highschool.

Just like Jim, Chuck saves 10% of his income but instead of putting the money in a box under his bed he invests it. The interest rate on his savings is also 10%.

At this rate it takes Chuck a bit less than 7 years to get 36 000 dollars. That’s a 3 years win over holding the money under your bed.
If Chuck were to double his savings and put aside 20% of his income a month it would take him just under 4 years to save as much as his yearly salary.

Since Jim and Chuck are both in their twenties this means that over a course of 30 years and saving 10% of their income they end up with the following:

• Jim who stacks the money under his bed ends up with 108 000 dollars

• Chuck who invests the money he saves ends up with $ 651 396 dollars.

Get this - they both saved the same amount over the same time but one ends up with over half a million dollars more. This money is living proof of compound interest at work. Chuck’s extra 500 000 dollars is interest that the 108 000 dollars that he saved from his paycheck generated over time.
If Chuck would have been able to invest his money with an average return of 20% a year as the famous investor Warren Buffett has done for over 30 years he would have ended up with 5 105 728 dollars.

The average return of the US stock market is about 12%. Getting a return of 12% instead of 10% would automatically make Chuck 973 053 dollars instead of 651 396. That’s a pretty big jump if you ask me.

When saving at least 10% and investing it for the long run you will end up with many times more money than you can save.

It is possible that money that you save ends up being 10 or 20 times more than you make during your lifetime from working.

Tips for saving money

Since saving 10% of your income will be unnoticed by most people it is an idea that I can not recommend enough. The 10% savings mark should be took as a starting point - over the course of a lifetime you should try to increase this to 20%, 30%, 40% and eventually as high as 50%. In countries like China, saving half of everything you make is the norm. Financially it is the best advice one could get.

The best way to start would be to make saving money as effortless as possible. Use the information that you already know from my previous tips about getting rich. If you have access to internet banking it should be possible to set up your account so that the 10% gets wired to a different account that you use for saving and investing.
Never keep the money you have saved on the same account with your everyday money. This gives you a false sense of wealth and makes it easy for you to spend the money that you should actually be saving.

Also keep in mind that saving money should always be done as the first thing after getting your paycheck - always pay yourself first.

When for some reason you should skip a month of saving as you have planned, always make the extra effort to get this money back. By paying back the money that you spent instead of saving you will tell yourself on a subconscious level that it is not OK to be spending this money in the future.

When deciding whether to save or not to save money one should keep in mind that because of the way compound interest works:

A dollar saved can eventually be 100 dollars gained