Core Habit #2: Invest the Difference

Developing the Core Financial Habits Series

Review of Core Habit #1: Spend Less Than You Earn

In the first core habit, we focused on creating margin; the space between what you earn and what you spend. That space is your freedom gap, the difference that allows you to move from survival to growth. Without it, no amount of income can lead to wealth. With it, you gain control and flexibility.

You learned that building margin is not about cutting every joy from your life. It is about aligning your spending with what truly matters to you. It is about living with intent and purpose. You defined your “why,” tracked your spending, and learned to live below your means so that you could devote part of your income to long-term investments.

That gap, the money you don’t spend, is now your fuel for wealth creation. It is your offense, your forward momentum. Core Habit #1 built the defense. Now it is time to take the field and score.

Understanding What Counts Toward Your Savings Rate

Before we talk about investing, let’s clarify what your savings rate really means. Many people think their savings rate includes everything they save: emergency funds, checking account surpluses, or vacation money. It does not.

Your savings rate only includes money that goes into your long-term investment accounts.

This means the money you place into:

• Your 401(k), 403(b), or similar employer-sponsored retirement plan
• Your Thrift Savings Plan (TSP) if you are a government employee or in the military
• Your Traditional or Roth IRA
• Your taxable brokerage account, so long as it is for long-term investing and not for short-term goals

These are the accounts that fund your Freedom Fund; the money that will one day replace your paycheck and give you full financial agency.

Your emergency fund, savings account for travel, or car replacement fund are important, but they do not count toward your savings rate. Those are short-term reserves. Your long-term investment contributions are what builds wealth.

The Savings Rate Formula

Here is the simple formula you should memorize:

Savings Rate = Total Annual Long-Term Investment Contributions ÷ Annual Gross Income

If your annual gross income is $100,000 and you invest $20,000 a year into your 401(k), IRA, and brokerage account combined, your savings rate is 20 percent.

Your savings rate determines how long it will take you to reach Financial Freedom. The higher the rate, the faster you arrive. This isn’t magic. It’s math. The more you save and invest, the more your money compounds, and the lower your required lifestyle costs become. A savings rate of 20% will take approximately 37 years to achieve Financial Freedom.

If you need a refresher, look back at the How Savings Rate Impacts Time to Financial Freedom table in the Core Habit #1 post. A 10 percent savings rate will take approximately 52 years to reach Financial Freedom, while a 40 percent savings rate could cut that to around 22 years. It is a trade-off between lifestyle now and freedom later.

The Long Game

By now you understand that this process takes time. It takes years — most often decades. But remember: wealth is not built overnight. It is built through small, consistent decisions repeated thousands of times.

This is not a sprint. It is a long season, full of practice, setbacks, and progress. Just as a championship soccer team trains, learns, and adjusts over years, you will build wealth through patience and consistency.

Core Habit #2: Invest the Difference

Once you know your savings rate and commit to living below your means, it’s time to put your margin to work. That brings us to the second core habit: Invest the Difference.

This is where the growth begins. The purpose of this habit is to make sure that every dollar you save is assigned a job — to earn more dollars on your behalf.

Think of Core Habit #1 as playing defense. You stopped the leaks. You controlled the ball. Now, in Core Habit #2, it’s time to push forward. Investing the difference is your offense. Every dollar you invest becomes a player on your team, working together toward your goal of Financial Freedom.

Step 1: Automate Your Investing

Automation is the single most powerful tool in personal finance. It takes your emotions out of the equation and replaces them with discipline.

When you automate your investments, you set up recurring transfers from your paycheck or bank account directly into your long-term investment accounts. The key is to make this happen before you ever see the money in your checking account.

If you get paid biweekly, your 401(k) contributions should be deducted automatically. If you use an IRA or brokerage account, schedule an automatic transfer to happen the same day your paycheck hits.

Automation ensures that saving and investing happen without daily willpower. It’s like showing up to practice automatically — you do not wait to feel motivated. You build a system that guarantees your participation.

Think of it like this: in soccer, a disciplined team always moves into position before the play develops. Automation is financial positioning. You are putting yourself where you need to be before the game even starts.

Step 2: Investing Is Not the Same as Depositing

This is a common and costly misunderstanding. Depositing money into your 401(k) or IRA does not mean it is invested. It only means the cash is sitting inside your account, earning almost nothing.

You must take the next step and choose where that money is invested. Otherwise, it’s like a team that brings the ball to midfield and stops playing. You are in the right arena but not taking the shot.

Once your money lands in the account, you need to assign it to specific funds. Most investment accounts allow you to set automatic allocation preferences so that each contribution buys shares in the funds you’ve chosen. This ensures your money is always working.

Step 3: Choosing What to Invest In

The right investments depend on your account type and available options. Let’s break this down.

Employer Retirement Plans (401k, 403b, etc.)

Your options are limited to the funds offered by your employer’s plan. The good news is that nearly every plan includes at least one of the following:

• An S&P 500 Index Fund
• A Total U.S. Stock Market Fund
• A Target Date Fund (these automatically adjust as you approach retirement)

Pick one that is broad, diversified, and low-cost. You do not need to chase exotic funds or time the market.

Thrift Savings Plan (TSP)

For military and government employees, the TSP is an excellent investment platform. The Simpli-FI.money approach is straightforward:

• The C Fund (S&P 500) should be your core holding
• Add a small percentage to the S Fund (Small and Mid-Cap) or I Fund (International) for diversification
• The Lifecycle (L) Funds are also strong options; they automatically rebalance and shift to safer assets as you age
• I wrote a special blog post on how to invest in TSP, you can find that article here: “Develop YOUR TSP Game Plan“

IRAs and Brokerage Accounts

In IRAs or taxable brokerage accounts, you have more freedom. You can invest in total market index funds, global funds, or S&P 500 funds. The guiding principle is the same: keep it simple, diversified, and low-cost.

The 80–20 Portfolio Mix Strategy

One simple and disciplined investing approach is the 80–20 Portfolio Mix. In this strategy, 80 percent of your long-term investment portfolio is invested in broad stock market index funds, which serve as the offense; the players scoring goals and building long-term growth. The remaining 20 percent is invested in short-term U.S. Treasury bills, which act as your goalkeeper.

This defensive position protects your portfolio during market crashes, reduces how much your portfolio can fall during a recession, and gives you steady, reliable capital you can rebalance back into stocks when prices drop.

The strength of this approach comes from balance and discipline. You are aggressive enough to grow wealth, but conservative enough to stay in the game during financial storms. Rebalancing once or twice a year keeps the portfolio aligned; trimming stocks when they grow too large and adding to them when they fall. You will not win every short-term rally with this mix, but you dramatically increase your chances of staying invested long enough to win the long-term season.

For a more in depth look at the 80-20 Portfolio Mix Strategy, here is a link to the post titled: “Thought Experiment: The 80-20 Mix Strategy”

The Simpli-FI.money Investment Philosophy

The Simpli-FI approach is built on simplicity and consistency. We favor low-cost index funds because they capture the returns of the entire market without unnecessary fees or complexity.

Index funds outperform the majority of active managers over long periods, and they do so at a fraction of the cost. The difference between a fund with a 1 percent fee and one with a 0.05 percent fee can amount to hundreds of thousands of dollars over your lifetime.

A low-cost index fund should have an expense ratio below 0.10 percent. Many of the best are as low as 0.02 percent.

This is not about picking the next winning stock. It is about buying the whole market, letting capitalism do its work, and staying invested long enough for compounding to reward your patience.

Examples of Low-Cost Index Funds

Here are 15 examples of widely available, low-cost index funds and ETFs as of 5 November 2025:

We are brokerage-firm agnostic. You can buy index ETFs through nearly any brokerage. If you invest in mutual funds, use those provided by your own firm to avoid transaction fees. For example, if your account is with Schwab, use Schwab funds instead of Vanguard mutual funds.

Step 4: Track Your Progress

Once your investments are automated and allocated, your next task is to measure your progress.

You cannot control short-term market returns, but you can control your behavior and track your growth over time.

Each year, compare:

1. The combined value of all your long-term investment accounts
2. The projected value based on your savings rate and the S.E.M. Calculator

You can access the calculator here: S.E.M. Calculator – Simpli-FI.money

Tracking progress builds motivation. You will begin to see the compounding effect — small, consistent deposits turning into meaningful growth.

Some people prefer to review their progress yearly, others quarterly or even every payday. Choose the frequency that keeps you focused without becoming obsessed.

Personally, I began tracking monthly, but eventually switched to every pay period. That cadence worked best for me, because it matched my rhythm of contribution.

Common Mistakes to Avoid

1. Leaving contributions uninvested. Always confirm your deposits are buying shares in funds.
2. Chasing performance. Avoid constantly switching funds to chase last year’s winners. Stick to your plan.
3. Trying to time the market. Even professional investors get this wrong. Time in the market always beats timing the market.
4. Ignoring fees. High expense ratios quietly drain your returns. Always verify your fund’s cost.
5. Losing focus in downturns. The market will drop. That is not a failure. That is part of the game. Keep investing.

Remember, in soccer, a team that panics after giving up a goal often loses control. The best teams stay calm, trust their system, and execute their plays. The same principle applies to investing.

Summary: Key Takeaways

1. Core Habit #1 built your margin and established your savings rate.
2. Your savings rate includes only money sent to long-term investment accounts.
3. Core Habit #2 ensures that money is actually invested, not sitting idle.
4. Automate your investments to make wealth-building effortless and consistent.
5. Choose simple, low-cost index funds for steady long-term growth.
6. Track your progress and stay consistent, even when markets fluctuate.
7. Remember: this is a long game. Patience, not perfection, creates results.

When you live by this habit, your money begins to work harder than you do. Each invested dollar becomes a silent teammate, running up the field even while you rest, creating opportunities for future freedom.

Next Up: Core Habit #3: Avoid Debt

You can have a strong offense, but without a solid defense, you will never win the championship. Debt is like playing a man down — every dollar you owe is a dollar that cannot play for your team.

In the next post, we will cover:

• The difference between good debt and bad debt
• Why high-interest consumer debt is the enemy of freedom
• Debt snowball vs. debt avalanche methods
• And how playing disciplined defense protects the freedom you are building

Stay the course, stay disciplined, and keep investing the difference. The game is long, but victory belongs to the most consistent team on the field.