I’ve been asking how much I should save every month for a long time and I must admit that when I was younger my answer was simply ‘whatever is left over at the end of the month’.
With the wisdom of a few grey hair I now know there is a better answer!
Rule 1
Put money aside at the beginning of the month, not at the end. This way you will be able to save more because, well, if you have money in your wallet or current account you are more likely to spend it. But if your money is on your savings account you are more likely to leave it there. This idea was popularised by Tim Ferriss in his bestselling The 4 Hour Week.
Rule 2
In The Richest Man in Babylon, the author George S. Clason suggests everyone should save 10% of their income, no matter how much their income is. I think this is a sensible start – but I personally would put the emphasis on no matter how much your income is.
If, like me, you are planning to stop working well before the government tells us we are allowed to (in my case probably 68 or later), 10% is simply not enough.
Rule 3
How much you save really depends on what you are saving for. The stronger you feel about your saving goal, the easier you will find saving and the more you will be able to save.
I’m saving to become financially independent so that I can decide myself when to stop working for a living. And that is before I will be 68!
In the FI (financial independence) community some people manage to save 50% and even 75% of their earnings. I save 45% of my salary every month:
25% savings for my pension (my contributions, the amount my employer matches, and the relevant higher rate tax credits)
20% pure savings (what I move to my savings account every month)
45% total savings
This is besides what I’m putting aside for my daughter. My husband has a similar savings rate.
If this sounds a lot to you, remember it is all about drive and dedication to reach the final goal: not working for a living. You can set your own yearly savings rate. This is just to show you that saving a lot can be done.
Rule 4
How much do you need to stop working for a living? Once you stop receiving a salary, how much money do you need to have coming in to pay for your living?
The FI community goes by the 4% rule – you should be able to take out 4% of your investment yield every year without your investment decreasing in real terms.
I find it easier to calculate it The Escape Artist’s way – to achieve financial independence you need 25 times your annual expenditures. So if you spend £25,000 a year, you will need investments worth £625,000, and so on.
Rule 5
Don’t get discouraged!
Starting from the basics, to become financially independent you need to:
- Spend less
- Earn more
- Invest you savings
But this is not enough. Equally important is to:
- Be mindful and conscious of your financial habits
- Plan – and stick to your plan!
- Get your life partner on your side (it’s easier to do things with someone else)
If you want to know how much you should save, sit down and think about how much you really want to stop working for a living and be financially independent. Then calculate how much you can really save.
Image courtesy of the York Press.
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