How Much Should You Save?

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If there is anything that I’ve learned over the many years, it’s that it’s not how much you make that matters, but how much you save. Earning more money from your job does help, but saving more of what you earn is more beneficial towards achieving financial independence.

This may seem counter-intuitive to what you might be thinking. “If I make more money, that means I’ll have more money to spend on things.” Getting yourself to financial independence isn’t about driving expensive cars, wearing designer clothes or living in a luxury home. It’s about earning enough passive income to sustain your standard of living without having to work.

If the definition of financial independence is to sustain your standard of living, defining what you are willing to live with becomes the most important financial decision. Do you know what you can live with and what can you live without? It’s not uncommon for individuals to make obscene amounts of money than us regular Joe’s make, yet they still end up bankrupt. Think of how many professional sports players and lottery winners who made millions, yet ended up in bankruptcy. Having all the money in the world means nothing if your standard of living consists of unlimited wants.

Save More To Retire Faster

Here’s the secret that no one ever told you. If you save a higher percentage of your take home pay, you can retire sooner. How much sooner? Much sooner than you think. Made popular by Mr Money Mustache, saving more of your money is logically the fastest way to reaching retirement. Why’s that?

The logic is simple. If you are able to save more of your income, say 50%, that means you’ve gotten yourself comfortable living on only 50% of your income. You’ve basically defined what you can live with as 50% of your current income. If that’s the case, then given the standard 4% retirement withdrawal rate, you won’t have to work as long to achieve that standard of living.

Still confused? Let’s apply some math.

  • If you make $50,000 and you save 10%, that means you are comfortable living on $45,000 a year. In order to achieve $45,000 a year with a 4% safe withdrawal rate, you would need to amass $1.125M in capital to invest to retire. That would require 22.5 years of gross income to retire. Hell of a long time.
  • If you make $50,000, but save 50%, that means you can live comfortably on $25,000. At a safe 4% withdrawal rate, you would need $625,000 or 12.5 years of gross income to retire.
  • Now say you’re frugal as hell, you can somehow save 70% and can live off $15,000 a year. That means to withdraw 4% from a portfolio safely one would need only $375,000 or 7.5 years to retire if you saved every penny.

Of course those numbers don’t equate for tax or investment gains, but you can get the point. If you can live off less and get used to it, then you can retire much sooner because to keep that same standard of living you are used to, would require less investment capital.

If you want to see some numbers with capital gains and investments, click on the link above. You’ll be astounded how saving more can quickly help you achieve financial independence. Actually some crazy stats that astound people are the fact that cutting the cable and a few trips to Starbucks every year and using Netflix with home-brewed coffee can actually shave 5 off working years. Crazy right??!

Increase Savings Rate With Raises

The key to successfully increasing your savings isn’t necessarily to live like a boring rock. It also doesn’t mean that you need to sacrifice everything in life just to retire early. It might mean to hold back desires when your income does rise.

Just because you get a big fat raise, shouldn’t mean that you should go out and buy a brand new BMW. Nor should you go out and buy the biggest house you can afford just because you got promoted.

Live within your means when you first start working. Get yourself comfortable by living on a set budget that you can be happy with. Once you start making more income, stick with the same standard of living you are used to. This means you are probably living below your means. Nothing is wrong with that. Since your budget should already be keeping you content, you won’t even miss the extra savings you are putting away. In fact, you might feel even better about yourself as you build up your investment portfolio.

Increase Savings By Sharing Costs

Somewhere along the line in life, you may feel the want to partner up. This is a great opportunity to start sharing costs that you would otherwise have to pay yourself. Utilities, food, shelter, etc… All these costs could be split up to make life easier.

These savings will mean more money for your investments. In fact, coupling up and joining resources can be extremely beneficial in helping increase your savings rate. As I’ve already written before, there are many financial benefits to pairing up especially if you are in a lower income bracket.

This same concept also applies when you are first move out on your own and trying to get your feet on steady ground. Perhaps finding yourself a roommate would make it more affordable. Why pay for the electricity and gas in an apartment on your own when you can split it? I know what I would do.

Put Your Savings Away First

giphy_catThe hardest part for anyone who is trying to save is actually saving in the first place. Unforeseen expenses like the car breaking down, the water heater blowing up, or the sink springing a leak always seems to catch us off guard.

That’s why these unforeseen expenses need to be budgeted and planned for before they happen. They shouldn’t be a surprise on your monthly budget. In fact that money should already have been saved and allocated for that surprise expense. When things are going well, an emergency fund should be created exactly for these types of expenses. This is just the cost of owning depreciating assets that need to be repaired like houses, cars and computers.

Once you have the emergencies budgeted, always pay yourself first! Put money away into your investments or savings first before you budget and plan for other monthly expenses. Get in the habit of paying yourself first and you’ll never have to worry about spending too much or running out of money. When you’ve already met your savings goal at the beginning of the month, you don’t have to feel guilty about spending the rest of your money. How good is that?

Just remember that saving your money is a habit. It doesn’t just happen right away. You need to be persistent at it. It’s like getting good at anything else in life. You need repetition and perseverance. Once you’ve mastered it, it will become second nature.

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