An easy formula to target how much to save each month
How to save more money
One of the most common questions that comes up when I first meet with people is how they can save more money or save for something special. This will sound like a simple answer (I do simple), but the obvious answer is to put more money aside each month and spend less. I could give a laundry list of ways to save money, but there’s plenty of sites or articles which will do that already (see the footnotes for examples if google is too much effort). Second, I can’t think of anything more vacantly stare-inducing than telling someone to forego that morning coffee each morning (at $3 per week-day, over 46 weeks a year that does work out at $690 for those OCD sufferers amongst us).
Instead, I thought I would share a principle that was told to me a couple of years back by a retired adviser I look up to. Think of what you want out of life with 70/20/10.
The easiest way to explain this is picture the money that hits your account each month. Let’s call it $5,000 to make it simple, but any sum will do for either a single or a couple.
70% – Today
70% represents all of the money you’re allowed to use for immediate expenses each month. This could be housing, groceries, restaurants, movies, schools, clothes, those $3 coffees, etc. Using the example, $3,500 per month you can allocate and spend as you like. Hopefully, if you have $5k coming in a month, you’re not renting a waterfront mansion and then eating dog food to go day to day.
The biggest tip I can give on this 70% is to remember the annual expenses that don’t get thought about. Think car/home and contents insurances, school uniforms, season tickets, and so on.
20% – This year or next
We started with $5,000 and now we’re down to $1,500. The next 20% is going to be used for short term goals. This could be a holiday to Fiji, a new car, skydiving, anything really that is coming up in the next 2 years that’s important to you. DO NOT call it “short term goals” as I have. This is important to you and no-one else, and you’ll get a lot more value out of calling it “Lisa and Greg’s trip to the US” instead. Go one step further, rename the savings account you have (I know you must have a second account rather than leaving everything in the one account, right?…) to what you’re saving for. Almost all the banks will allow you to rename the accounts online, and it will have some more meaning for you if it’s tailored.
Tip: Be descriptive when it comes to naming this account. The more you’re able to imagine yourself experiencing your goals, the more naturally motivated you’ll be.
10% – Down the track
That last $500, we’re going to save that as a rainy day and long term savings. I’m not necessarily saying use it for retirement or put it to super, but certainly for either a property purchase, university fund, a year off work to write a book, whatever is down the track for you. This has one additional benefit by being separate from your short term savings that probably doesn’t spring to mind. If you need to change jobs one day and have to work somewhere for less pay, you’re already used to making 10% less than you otherwise would be. You’ve already trained yourself in to spending 90% of what you earn.
Tip: Separating your short term and long term savings allows you to stay within budget for your short term projects.
Certainly everyone’s needs are different, but two things I can promise:
- You shouldn’t have problems with debt or the bank if you’re spending 70% of what comes in each month; and
- Should your personal situation change and you make less each month, it won’t be such a drastic change to your hip pocket.
Now, go out and buy that coffee!
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