There is but one constant in building wealth and that is to spend less than you earn. If we boil it right down to the simplest of forms, you can never be rich if you spend more than you make.
How Much To Save?
Every financial book out there will throw out a number or percentage of your pay that you should save and invest for retirement etc. but there is no magic number that works for everyone.
Some have said that saving or investing 20% of your income is a great amount and this is attainable by most folks if they make the correct lifestyle choices.
Some have loftier goals, such as Trent over at the Simple Dollar, who recently advises newly graduated workers to save 50% of their take home pay! While that may seem unattainable, let’s look a little closer at the idea.
If you are reading this blog, then you are looking to make more money, save more money, or find a way to retire earlier. Now that we have agreed on that point, let’s examine another point.
When I recently wrote about automatic savings accounts like ING Direct and why I believe they are essential, I also mentioned that they are useless unless there is a goal attached to it. The reason that they are useless without a goal is that there is really nothing stopping you from spending that money unless the reason that you are saving it is stronger than your desire to fulfill your “need” for immediate gratification.
For most of us, saving 50% of our income seems unrealistic. I’ll admit that it seems daunting to me at the moment as I am expecting my first child in a few weeks (
kids are expensive pregnant wives are expensive).
The amount that we save really just depends on our choices. This is no secret, but it has been the basis for many successful personal finance books, from the Automatic Millionaire to the Wealthy Barber, it’s really all about choices.
I made the choice to save more than 50% of my income for nearly two years as I saved in order to write that big cheque that paid off my $40,000 in student loans less than a year after leaving college.
What was the trick?
I lived like I was still in school (I was still in school for one of those years, but working full-time too).
Back to the conversation at hand.
We must have a certain level of income to provide us with shelter, food, water, and clothing; everything else is optional.
The Options Make The Difference
The optional items that we choose to purchase with our disposable income are what make the difference in our wealth. Again, a simple concept that has sold many millions of books.
The optional items that we choose in order to increase our comfort cost us money. That is the surface of the conversation. However, when we look deeper into what it is really costing us is time/freedom.
The argument for saving 50% of your income translates into buying one year of freedom for each year worked. In addition to this, the effects of compounding also come into play.
For each year that we save and invest 50% of our income, we are earning more and more freedom – assuming we keep our expenses at the same level relative to inflation (annual salary raise).
This example is very extreme and may be viewed by some as going overboard. However, it does prove the point that it was intended to make.
At some point in your quest to save more money, you will reach a crossover point where you begin sacrificing your basic lifestyle for savings. This is not healthy either because you can never tell what tomorrow will bring.
I believe that each person or family must find that delicate balance between a comfortable and enjoyable lifestyle and the emotional and psychological benefits of a secure financial future. I am sure you will agree that this is much easier said than done.
How To Start Saving
The way I started automatically saving money was to set up a separate high interest savings account to which I began having automatic transfers made on each pay day. I have since kept increasing that amount as I find new way to make more money or spend less. Some months I am able to increase the transfer by just a few dollars, while other months I find ways to make a significant increase in the automatic transfers.
Try it out for yourself and see how far you can push yourself and just how much you can save when you are consciously thinking about it.
If you don’t already have a high interest savings account, you can sign up here at ING. They even offer sub-accounts so that you can compartmentalize your savings. I have a sub account strictly for the new baby and another for funding my brokerage account. I find that sub-accounts make it easier for me to organize my saving goals.
There is no “one size fits all” solution, but I hope that this example will help you to find yours!