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.

Not even £100

Take action, and take action now.

— Brian Tracy

I stumbled across an article today from The Independent, by mistake mind you, as I don’t read or watch the news. But a portion of the article shocked me. It said: “22 per cent of UK adults have less than £100 in savings, making them highly vulnerable to a financial shock such as losing their job or incurring unexpected bills.”

Wow! Not even £100 in savings. You could save 28p a day in a penny jar and have over £100 at the end of a year. Yet 22% of all UK adults don’t have that much money saved.

From a website, I got the following statistics. There are roughly 66 million people in the UK as of 2019. About 53 million people in the UK are adults.

Almost a quarter of all adults (22%), that’s 11 and a half million, don’t have even £100 in savings.

If all those people who don’t even have £100 in savings got up and moved to their own country, they’d be the 77th largest country in the world. Bigger than Belgium, Greece, Portugal, Hong Kong, Singapore, Denmark, Norway, New Zealand, the list goes on.

In the article it talks about these 22% are, “highly vulnerable to a financial shock such as losing their job or incurring unexpected bills.”

There is no way £100 in savings is going to ride the rough sea of losing their job. It won’t even cover a bill such as excess on car insurance if they have a prang. £100 will hardly deflect any type of emergency that comes up. It might deflect a hiccup, such as your only pair of shoes just fell to pieces, or you need a new passenger side tyre. But anything that is “emergency” size, such as losing your job, the boiler blowing up, or your car eventually dies. £100 won’t make a ripple in the ocean.

If you are in this situation, what should you do?

The first thing to do is don’t panic… There are over 11 million others floating around on driftwood in the ocean with you, so you’re not alone. But you need to immediately start looking for land to get some security. You can’t worry about the rest, you need to worry about you.

What you need to do is build an emergency fund… of a lot more than £100.

An emergency fund is a pot of money, that you can get your hands on immediately, such as going to the bank and withdrawing it. This pot of money is magic, as it stops you going into debt to pay off any emergency that arises. The problem for these 11 million adults is that if an emergency happens, they don’t have an emergency fund, they don’t even have £100. So they really only have a couple of options, all are not good.

Option 1, live with the emergency and save up. This might work if your car breaks down and you work close enough to walk, run or bike, but it doesn’t work if your boiler blows up and it’s the middle of winter.

Option 2, borrow off friends or family. This option is not good for relationships and should be avoided.

Option 3, borrow, either in the form of a loan, credit card, or any type of other lending such as the dreadful pay day loans. Option 3 is the worst option, as a £1,000 emergency ends up costing you a lot more when paying interest to the lender. Nope, there really is only one real option, and that’s build an emergency fund as quick as you can, before disaster strikes.

This will take time, patience and a drizzle of sacrifice.

The end goal is to get an emergency fund of at least 3 months of your expenses, but the preference is 6 months. Example: if you add up all your bills: gas, mortgage/rent, water, food, electricity, broadband, gym, etc, that figure will be your monthly figure: let’s say £1,000. You then need to save between £3,000 and £6,000. So for 6 months of expenses you need £6,000.

The odd thing is, once you get that emergency fund up and running and full of money, emergencies stop happening.

Conclusion

If you are one of the 11 and a half million that doesn’t have £100 in savings, I feel for you. But, no matter what’s going on in your life, it’s time to start making some changes and begin to build that emergency fund. You’ll feel mentally and physically better as you begin to save each month and see the fund building up. As your financial life improves, your health and well-being follows suit.

Increase your contributions

Do the best you can until you know better. Then when you know better, do better.

— Maya Angelou

Regarding money, a lot of people like to tinker. They move their savings from one account to another, then maybe put it in a cash ISA, then maybe move it to a stocks and shares ISA in pursuit of a higher interest rate. Then move it to a different ISA provider, then move it to the latest internet bank offering a better interest rate with only a £2 a month fee. And on and on it goes. People love tinkering. And if they are investing, it’s even worse. They sell this stock and buy that stock. They move from stocks to bonds and back again. Then they move their money to currency trading, then peer to peer, then to crypto currency. Back and forth, around and around. This broker and then that broker. All the while picking up expensive transaction fees.

What people really should tinker with is their contributions. They should pick a good returning cash ISA, if they are building their emergency fund, and then stick with it, until their interest rate term changes. If they are investing in the stock market they should pick a low fee stocks and shares ISA with a provider like Vanguard, and then invest in an index fund with great diversification. After that the only tinkering they should be doing is with their savings rate.

If they are saving 10% of their net salary each month, they should then tinker with the savings rate and increase it, on a regular basis. Maybe three months after saving 10% of their net salary they then increase it to 11% or 12%, or be bold and go to 20% or 30% or 50%+. And they should rinse and repeat this often. Your savings rate is one of the most important things you can control in your journey to becoming financially independent.

If you get a pay rise then this should be a mandatory step for increasing your savings rate. You should increase your savings rate by the amount of pay rise you received. This is because you’ve been happily living off your salary before the pay rise, so you’ll continue to live off the same salary as before and bank the increase each month.

This approach should also happen when tinkering with your workplace pension. You should nudge that up regularly as well, and especially after a pay rise.

So rather than trying to be Gordon Gecko and selling high and buying low, as the majority of the smartest people in the world of investing fail to do this, so why should you be any different? You should instead tinker with your contributions and keep increasing them, even by 1%, and it will make a hell of a difference.

To close, allow this example of a 1% difference.

Let’s say as a net salary you earned £1,000.

So a 10% savings rate would be £100. Invest that £100 a month in the stock market and get a 7% return over 40 years and the amount would be: £247,154.20.

Now 11% is £110. Only £10 more a month. Maybe the cost of a pint of beer and a glass wine. Do the same calculation above and the total is £271,869.62.

The difference is a whopping £24,715.42! Just for an extra 1% increase.

Let’s look at an extra 10%. So our savings rate is £20% or £200 a month. Same calculations, and the total is: £494,308.40!

Tinker with your contributions, leave everything else alone. You will increase your wealth and minimise fees.

Start now!

Someone is sitting in the shade of a tree today because someone planted a tree a long time ago.

— Warren Buffett

Start now. Don’t think about it. Don’t wait. Don’t check with your spouse or best friend. Don’t stall until payday. Don’t research every angle. Don’t put it off. Don’t procrastinate. Start. And start now.

Start saving now. No matter what your situation is, no matter how much debt you’re in. No matter how little your salary is. No matter what you need to buy this month. Just start saving now.

Call your bank, visit your bank, use your online banking or your banking app. If you don’t have a savings account or an ISA, just open one right now and set up a standing order, meaning money automatically leaves your account as soon as you get paid, and goes into your savings account or ISA.

Don’t know how much to save? Just start. Start with anything: 200, £100. £50, £20, £1. You can increase the amount later once you become financially organised. But just start. The sooner you jump into the habit of saving an amount every payday, the sooner you’ll be rich. Create the saving habit. Just start today.

And for those reading this that’s already done the above either months or years ago, then right now increase the amount you save every month. Move it up 10%, 5%, even 1%. But increase your contributions. You should be increasing your contributions regularly. Nudge your saving rate up by 1%. Live without that money for 3 or 4 months and you don’t notice it has gone. Then nudge it up another percent.

Rinse and repeat.

Start now!