What’s the most effective way to build financial security through savings? How can you make the most of every dollar you save?
In Set for Life, Scott Trench presents a bold approach to financial independence through strategic saving and wealth building. His method challenges conventional wisdom by encouraging aggressive saving rates while providing practical guidance for managing and growing your money.
Keep reading to discover how to manage savings in ways that can transform your financial future.
How to Manage Savings
Trench advises that you aim to save over half of your paycheck and live on less than $2,000 a month, and he provides advice on how to manage savings with an eye on financial independence down the road.
(Shortform note: If you live paycheck-to-paycheck, you may find it helpful to start with a lower savings rate and gradually increase it when you can. Trench’s suggestion to save over half your paycheck is more aggressive than the conventional 50/30/20 budgeting rule, which recommends saving 20% of your income while allocating 50% to necessities and 30% to discretionary spending. So, if you’re not quite able to save as much as Trench suggests, the 50/30/20 rule can be a good starting point.)
Trench advises that you use your savings in three ways.
1. Create an emergency fund. Set aside $1,000 to $2,000 for unexpected costs. This safety cash allows you to handle sudden bills, like a car repair, and avoid taking on new debt.
(Shortform note: Where should you keep your emergency fund? While you could keep cash at home, experts say the safest option is usually a dedicated savings account at a bank or credit union. These accounts protect your money from theft or loss while still keeping it readily accessible for emergencies. If you prefer not having direct access to the funds, a prepaid card can work as an alternative, though you’ll want to carefully track the balance.)
2. Clear your debts. Your approach to clearing your debts would vary depending on the kind of debt you have: Bad debts are those that have high interest rates, incur late fees, or hurt your credit score. Pay those off immediately after you set up a small emergency fund. Good debts are those with low interest rates like mortgages, student loans, and car loans, and you can pay these off more slowly. For good debts, choose to either clear small debts first for psychological wins or target the highest-interest debts first for maximum efficiency.
(Shortform note: Financial experts have long debated the best strategy for clearing debt—both good and bad. While some suggest paying off smaller debts to build motivation like Trench discusses, financial expert JL Collins argues that you should prioritize clearing your highest-interest debts. In The Simple Path to Wealth, he contends that paying off smaller debts just because it feels good costs you more money in the long run. He also advises against common debt-reduction shortcuts like credit counseling services or consolidating loans to get a lower interest rate. These strategies just stretch out your payments and cost you more in fees.)
3. Set aside a year’s worth of savings. Trench encourages you to save $10,000 to $25,000 in easily accessible wealth. You can keep this money in a bank account or invest it through after-tax brokerage accounts in stocks, bonds, and funds. While investing offers potential higher returns, you’ll need to decide if you’re comfortable with the risk versus keeping it safely in cash. Regardless, having a year’s worth of savings gives you the flexibility to pursue new opportunities without fear of running out of money. You could, for example, switch careers or start a business knowing you have a year’s cushion of savings to fall back on.
(Shortform note: Consider automating your finances to contribute to your savings more easily and consistently. In I Will Teach You to Be Rich, Sethi explains that it’s hard to manually manage our savings because we forget, get distracted, or simply lose motivation. By setting up a system of automatic transfers from your checking account to your savings account, investment account, credit card, and bills, you can ensure that your money is going where it needs to each month without having to think about it. This way, you can steadily build a year’s worth of savings without needing constant attention or willpower.)
