Break It Down Monthly
There’s a variety of different rules and savings structures out there.
Two very common saving allocations are the 50/30/20 rule and the 80/20 rule.
The 50/30/20 rule advocates for utilizing 50 percent of your post-tax income towards addressing all of your necessities. This will include everything from rent, groceries, utilities, etc. 30 percent of your income will be diverted towards extra desires-dining out, entertainment, date nights, and the like. 20 percent of the rest of your income will be pushed into savings and investment accounts.
The 80/20 rule is simply having 20 percent of your post-tax income be directed towards savings and 80 percent will be used for all of your other spending needs.
In the spirit of aggressively saving/investing towards reaching financial independence at an age where you can actually enjoy the fruits of your labors, I strongly recommend saving a minimum of 20 percent of your post-tax income.
As your income grows, do your best to keep your overhead low and not elevate your lifestyle. Keeping up with the Joneses is a never ending treadmill. Learn to get the most out of the least. If you can, push past the 20 percent and reach your financial goals even more quickly.
If you can’t save 20 percent right now, it’s alright. Now, you have something to strive for. I challenge you to get there. Do it for yourself.
Why 20 Percent?
As inflation continues to rise, saving 10 percent just won’t cut it, unless you plan on working like a dog for the next 3 decades. That’s not to say you should stop working if you enjoy building your career, but the goal is to reach the ability to have the option not to.
Saving 20 percent will serve to push you in your financial decision making process and help draw clear lines as to what is a need, and what is a want.
A positive by-product of this process is you will develop your own sense of what is important and meaningful in your life.
How Will This Further Your Financial Goals?
The ability to save 20 percent will serve you mentally in the long run and help to wire your mindset into being able to analyze quickly whether a purchase will further your life or not.
As we all know the magic the compounding interest, the earlier in life you can build the snowball effect of investments and savings, the faster you can reach financial independence.
A standard rule of thumb is accumulating enough money in your investment vehicles to essentially live off of 4 percent of your principle balance. This means that if you have accumulated enough capital to live off of withdrawing 4 percent out of your investments, then you have reached financial independence.
This means you should aiming to save up enough total capital to have 25x your annual expenses. The emphasis is on your expenses, not 25x your overall income right now.
How fast you reach this goal is ultimately up to you. There’s a variety of factors to consider: your savings rate being one of the big ones.
If you want to elevate your lifestyle later on in life, I would even encourage saving up to even 50 percent of your post-tax income. This is currently a big goal of mine to strive towards that number. I currently live in the Bay Area, where cost of living and rent eats a large amount of my work paycheck.
Find more ways to make more money by aggressively building your career and finding extra ways to make money on the side. As you elevate your income, throw even more into savings to snowball your way to financial independence more quickly.
Limitation Mindset – Get Rid of It
Everyone has some hard times and obstacles that they have to do with in life. Everyone.
That’s not much of an excuse to start saving even more.
“I can’t save, I need every single dollar I earn.”
That is a limitation mindset. Avoid it, change it. I would be willing to bet a good amount of money that if you make $1874 in post-tax income monthly, that you are not spending exactly $1874 monthly.
Don’t victimize yourself, as it serves to only hurt your life. There are many, many valid emergencies that come up in life that could decimate one’s savings. All the more reason to save more aggressively to address those potential future mishaps and avoid debt.
All in all, there should be no excuses as to not saving.
If you haven’t started already, as with anything, NOW is the time.
Challenge: Twenty Percent – Getting There
Again, I live in one of the most expensive places in the entire world, and I make sure to save a minimum of 20 percent of my post-tax income. If you’re living in an area with a lower cost of living, there should be no reason not to save 20 percent.
Find out all the pain points in your budgeting and spending. What is essential and what could be cut out.
Don’t let the number scare you, but rather motivate you to re-prioritize what is important in your life!
Let’s get after it!