The Habits That Shape Your Financial Future
How do you increase the odds of achieving financial independence?
It starts with consistently turning your earned income into asset year after year - taking your W2 wages and/or practice distributions and reinvesting it into assets.
Back into the business, into your retirement and other investment accounts, real estate, or other businesses. Then spinning that wheel over and over again for decades.
Building strong habits and systems around this process is the cornerstone of long-term financial health.
James Clear, in his book Atomic Habits, puts it perfectly:
“You do not rise to the level of your goals. You fall to the level of your systems.”
Your goal might be financial independence, but the progress comes from your systems and habits. That’s why automation—setting up systems to save and invest without needing constant willpower—can have a huge impact on your financial journey.
At Optometry Wealth Advisors, we measure this through key cash flow health indicators:
- 💸 Spend Rate: Percentage of gross income used for lifestyle and giving.
- 🏦 Debt Rate: Percentage of income going to debt payments.
- 🧾 Tax Rate: Percentage of income going to taxes.
- 💰 Savings Rate: The percentage of gross income invested for the future
These are your leading health indicators. You can't control how the future unfolds, especially when our goals are decades away and uncertain. We can't control how investments behave. But we CAN control how we use our dollars.
Savings Rate may be the most important indicator of the future health of your net worth - a critical vital sign. I'd consider a "healthy" Savings Rate to be 15%-20% of your household gross income.
This may not happen right away, and you may need to adjust through the years as life unfolds and other expenses come up. But it's a great vital sign to aim for.
To illustrate the power of Savings Rate, consider the follow chart of a hypothetical OD earning $180,000 of income (not including inflation). The chart shows the outcomes over 35 years investing at different savings rates but the same rate of return.
Just a 5% increase in savings rate from 5% to 10% led to a ~193% higher ending balance at age 65. Going from 10% to 15% lead to a nearly 150% higher ending balance.
What if you experience worse investment returns than anticipated? Nothing shields you from lower than expected long-term returns than a healthy savings rate, as shown in the chart example below. Each savings rate is paired with a different annual rate of return.
While wise investing matters, no investment strategy can fix a cash flow or savings issue. You can't out-invest a savings/cash flow issue.
There may be the temptation to take on more risk to try and "catch-up" or "get ahead". I've seen this in many flavors - lottery-ticket individual stocks or cryptocurrencies, expensive private or real estate investments.
Chasing high-risk investments for "higher" returns (even with the promise of "lower risk") often backfires, leaving you worse off than when you started. The key? A tight focus on saving and automating over long periods of time. It's not shiny. It's not exciting. It's a long-term grind that requires patience. But by golly, it works.
The ups and downs of markets are out of your control. But your systems and habits are not. Keep an eye on these leading indicators, especially your Savings Rate, and aim to automate your savings. Progress may feel small at first, but over time, these habits will lead to a healthier financial future.
As James Clear reminds us:
“Goals are good for setting a direction, but systems are best for making progress.”
Want to discuss building or fine-tuning your financial habits? Wondering what to do with your extra cash flow, in the practice or household? Just respond to this email, or click here to book a no-pressure intro call.
Have a great weekend!
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