17 Apr How Much $$ You Should Save
How much money should I save? I get asked this question all the time. The simple answer is as much as you can. Seriously, every 1% you save will have a huge impact on your future net-worth. In fact, just increasing your savings rate by 1% could help you retire up to 2 years earlier due to the impact of compounding. My simple recommendation for anyone in their 20’s or early 30’s is at least 25% of your income, but I know that’s not easy, or even possible for some people. But you can probably save a lot more than you realize.
Over the past few months, many of the articles about me focused on how I saved 40-50% of my income on my journey to $1 million. Many readers, commenters, and even Michelle Singletary of The Washington Post thought escalating my savings rate from 15% to 40% was aggressive and not possible for most people.
Sure, it’s tough to save money but I think the biggest reason people don’t save more is because unfortunately in popular culture “saving money” is portrayed as a sacrifice. As long as you, or anyone else, is viewing saving as a sacrifice, you aren’t going to save much money.
Saving shouldn’t be an afterthought. You shouldn’t save the money that’s left over because there probably won’t be much. Most people spend every dime or even more than they make. You should always save money first – 5%, 10%, 20%+ of your income, as much as you. And then spend what you have left. This accomplishes a number of things. First, you save more. Second, you can spend the rest of the money after without feeling guilty. After you know that you’ve saved 25% of your income this month, you’ll feel great, and not worry about spending the rest of the money you made.
Just that simple switch makes all the difference. When you save money, you are not only paying yourself first, you’re guaranteeing you will have money in the future. Then if you invest intelligently, you will guarantee you have even more money in the future. In my case, ever dollar I invested in 2010 when I started, is not worth $3.25. My investments have tripled and all it took was a few clicks on my phone.
Saving money is hard at first but gets A LOT easier over time. Trust me, once you start saving more money you get used to it and won’t miss the money. But, the key to saving more money is to start slowly and escalate over time. This is why I developed the $50 a day early retirement strategy for myself. After saving daily for 3 weeks it will become a habit. It’s super easy to hack your brain – just keep repeating something daily and after 3-4 weeks you’ll want to do it.
Here’s another take on how much money you need to save from the podcast.
Almost anyone can save money by starting at $5 a day
Sure, there are some people who simply don’t make enough money to save because everything they make is going to food, housing, childcare expenses, insurance, and other living expenses. But these are a lot of the same people I see driving around in new cars with $50,000+ car loans. If you are making $20,000 or less per year then it’s going to be very hard to get ahead, but you definitely can. You just need to start small and try to escape living paycheck to paycheck. It can take a very long time to save up enough money, but even $5 a day adds up to $1,825 per year. Almost anyone can save $5 per day if they really focus on it. I found $5 on the ground yesterday, flipped out, and then invested it immediately via my phone. If you invest just $5 a day for 5 years you will have $9,125!
According to the US Census bureau, the average annual salary in the United States for a millennial is $35,000, which is not a lot to live on depending on where you live in the country, but it’s definitely enough to save $5, $10, or even $20 a day. Don’t get ahead of yourself. Just save something small every day. For someone making $35,000 a year, saving $5 per day is only 5% of your income.
For anyone making $35,000 a year, saving $5 per day is only 5% of your income.
The average American spends almost $800 per year on lottery tickets and people who make $20,000 or less spend an average of 10% of their income on the lottery. That’s the $5 a day right there. If you just save $5 per day and invest it in a Vanguard Total Stock Market Index Fund with an expected 7% annual compound rate of return, you will have $10,840 in 5 years, $77,263 in 10 years, and $177,082 in 30 years. All from 5 dollars a day.
3 ways to save more money and build wealth
1. Cut back
It’s tough to get ahead by just being frugal, cutting out all of the extra in your life will make you happier. Way too many of us just have too much stuff, buy too much stuff, or live beyond our means. Cutting back is all about balance and finding areas of your life where you can save money and start investing in yourself. One of the biggest ways I personally cut back was by downsizing my home when I went from a $1,500 a month apartment to an $800 per month apartment. Sure it was smaller, but I decided that the $700 a month that I would save, invested, was a better use of the money. I paid myself first. I made that decision in 2011 and every $700 I invested then is worth $2,500 today. Since I did it for a full year, the money I saved and invested by downsizing is worth $27,000 today. That’s a lot of money for just moving to a smaller apartment.
2. Make more money and invest the increases
Making more money is more important than cutting back or being frugal. It will help you get ahead a lot faster, especially if you invest all of the new money you make. There are literally an infinite number of ways to make more money, but the two easiest are to start a side hustle and get a raise. Every salary raise has an impact on your future income potential, so even a $2,000 or $5,000 can have a huge impact over the life of your career. But what’s even better – investing 100% of all of your salary raises, bonuses, or any extra income you make. If you can keep living on your current salary as long as possible and invest the difference you will come out way ahead. Sure investing 100% might be extreme, so try 50% or 75%. When you get a raise, talk to your HR department and tell them you want to increase your 401k contribution by contributing 50%, 75%, or even 100% of your recent salary bump. For any bonus you get, set aside 10-20% to spend on whatever you want, and invest the rest.
If you can keep living on your current salary as long as possible and invest the difference you will come out way ahead. Sure investing 100% might be extreme, so try 50% or 75%. When you get a raise, talk to your HR department and tell them you want to increase your 401k contribution by contributing 50%, 75%, or even 100% of your recent salary bump. For any bonus, set aside 10-20% to spend on whatever you want, and invest the rest.
3. Or do both! Spending less money AND make more money = crushing it
This is where you get the biggest growth and build wealth a lot faster. Where the real magic happens. The greater the difference between how much money you make and how much money you spend, the richer you can get. The key is to save and invest the difference. This is why the richest people I know are the most frugal – they get it. Warren Buffett, the world’s second-richest man, never spends more than $3.17 on breakfast. The takeaway from this post – be more like Warren Buffett! But don’t eat McDonald’s, opt for a green smoothie instead 🙂
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