How much should I save?

The first $100,000 is a bitch.

— Charlie Munger

10% is what most people will tell you is a good savings rate. And if you do that, you’ll retire at aged 65-70 with a good chuck on money. Well done.

But… you’ll soon be dead. Even if you have a good innings and make 100, that’s only 30 years. And probably when you’re 97 you’re not going backpacking around Australia, you’re probably doing very little.

So, how can you have tons of money at a young or youngish age? Answer: increase your savings rate.

11% is better than 10%, and 12% is better than 11%. But you should go aggressive. 25%. 40%. People in the FIRE (Financially Independent Retire Early) community do 50%+. Some as much as 85%. Sounds bonkers and not achievable, yet people are saving that much.

To improve your savings rate one thing you can do is look at all your expenses and reduce them. Do you need Amazon Prime, Netflix, Sky, Hulu or can you just have the best one or even the cheapest one? Or better still, how about none? Have you changed your service provider for your electricity, gas, internet etc and got a cheaper deal? Can you walk/cycle to work rather than using the car? Are you eating at restaurants for lunch every day like a mafia boss? Then cook more the day before for dinner and bring it in as lunch the next day. Take a look at all your expenses and see where you can shave some money off. And when you do shave some money off, don’t just use that money to buy a TV for your toilet, add it to your savings rate.

Another good thing to increase your savings rate is nudge it up by small increments regularly. If you’re saving 17% of your net income every month, in three to six months time increase that to 18%. Do the same again in another three months and get it to 19%, and so on until you can’t go anymore. You soon learn to live life comfortably without that additional percent reduction.

And one more quick tip, if you ever get a pay rise, then move all of the amount you received in the rise and add it to your savings rate. The reason is you’ve been living comfortably without that extra money before, so why would you need it now? A 2-3% percent pay increase every year will soon snowball your savings into a Monopoly sized wad of dough.

And lastly, if you really struggle to save anything, then begin with just saving 1% of your net salary. Doing this is better than saving 0%. So if your net salary, the amount in your account after taxes, is £1,000 a month, and you save 1% of that, then you will save £10. When the next pay day comes, you do the same thing. You do this for three months and then move up to saving 2% and you keep increasing every couple of months until you have a high savings rate, and can live in comfort. And when I say comfort, I don’t mean you buy a new pair of trainers every week type of comfort.

Good luck and get saving.

Author: The Pound Pence Team

We're Garry and Dave, and we're addicted to talking about money. We want to help as many people as possible become financially free by setting financial goals, getting out of debt, building an emergency fund, saving into their pension, buying their own property and investing for the long term over many decades. We don't do get rich quick, but we do get rich.

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