I received a lot of push-back after publishing the article on Sound Financial Planning | How much do I need to save?.
Saving 15% consistently is considered an impossible task by many. In fact, there are some feelings that by saving that that much for retirement you would be sacrificing lifestyle now for something you can’t visualize in the future.
They understood the research was the research, but were mostly shocked at how far they were from reaching at least 15% in savings.
Because of that here some steps you can take to help reach the 15% threshold.
Remember the 15% savings threshold is for a period of saving over 30 years to cover 30 years of retirement. If your time window is smaller, then you will need to reach a higher savings threshold. Even for higher savings rates the same steps apply.
Step 1: Understand the risk
The first step to meeting a higher savings rate is to truly understand the alternative.
Of all things in finance the one thing you can control more than anything is your spending.
You can’t predict your future investment returns. You can’t predict your future tax laws. Today and always you can control your personal savings rate.
My favorite visual image of not saving for the future is the risk for you eating cat food in retirement. While I don’t mean this literally, it is pointed towards visualizing a real hardship upon retirement.
It’s clear that an overinflated lifestyle today can equate to a dramatic hardship during retirement. If you can’t visualize a hardship during retirement here are a few other risks of not saving enough:
- By spending 100% of your earnings today and you lose your job it’s much more difficult to find a job that replaces those earnings. It’s much easier to find a job that replaces 85% of your previous earnings to get you through that tough time.
- If you get a late start on your retirement savings journey you could still work less when reaching retirement age by finding a part-time job. Similar to the point above you could take a less stressful job that replaces a lower percentage of your previous earnings.
- In retirement you will have a more fixed income stream, so establishing good habits early makes the transition to retirement easier.
- The more you save now, the bigger your nest egg later.
- You can rely on a lower initial withdrawal rate to ensure your money lasts a lifetime.
Step 2: Gain awareness
Now that you understand the risk of not saving enough and you’re motivated to save more you need to gain awareness of your spending.
The reason you don’t know how to save is very likely because you don’t know how much or where you’re spending your money. If you don’t measure something, you can’t improve it. How will you ever save more if you don’t know where your money is going?
Important to note is that it is doubtful one look at your spending will open your eyes to a 10% spending cut. Gaining awareness of how much and what you’re your money spending on gives you the baseline of where you can stop spending more, lead you to possibly spend less, and most importantly it creates guardrails to manage your spending.
Everybody who reaches true financial freedom has gained a solid understanding of how much and on what they’re spending their money on.
Being new to this I recommend looking at your money tracking system at least once a week for a year. My favorite day is to look at it on Sunday when I’m relaxing in the evening or in the morning when I’m cruising the internet.
Step 3: Values check
Once you begin tracking your spending you should then take a step back and look at what you’re spending your money on. Maybe the first time you look at it you won’t see anything that glaringly needs to change. It’s possible everything on their matches your values.
However, as you begin to consistently watch your spending you will gain a conscious awareness of how whether or not that purchase should fit into your cash flow.
Ask your self: Do I really need this? Would buying this fix a pain in my life?
By giving your spending a values check you’re really doing is optimizing your life for happiness. You won’t realize this until the first moment you find an expense and say to yourself “I spend that much on this! Ugh!”
By spending only on what makes you truly happy you won’t feel shorted on life. You will begin to feel empowered and free.
Step 4: Basic savings techniques
While you’re working at the hard parts of tracking your money and mentally comparing it to your values system here are the basic savings techniques you will need to start implementing:
- Save at least enough in your employer’s 401(k) to receive the maximum matching contribution.
- If you don’t do this you’re missing out on FREE MONEY from your employer that counts towards your savings goal.
- Assuming you’re eligible based on your tax situation, the majority of savers should fund Roth IRAs to the maximum.
- Pay larger premium payments on your mortgage OR work towards maximizing your 401(k)
- If you don’t own a home then establishing a savings account to build for a down payment counts as well.
- Setup automatic deduction from your paycheck that goes directly into your savings account(s).
Starting with these good, consistent savings techniques provides for great long-term wealth creation.
As you begin to receive raises you should establish a savings strategy that saves a portion of each raise equivalent to your goals. For example, if your goal is to go from saving 15% to 20% saving half of each raise is a great way to get there. You gain the best of both worlds. An increased standard of living and one step closer to reaching your saving goal.
Ultimately, it’s your choice to choose personal freedom later or self-indulgence now. In our world of instant gratification and consumerism it makes the prioritization saving now nearly taboo. If you value freedom over stuff then you can create the life you desire.