Show Me The Money

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“Losers have goals. Winners have systems.”

– Scott Adams

 The inspiration for this post came from having a conversation about personal finance and savings with one of my close friends. I outlined what I was doing for the last few years and how I had increased my savings amount in step with my income. He said he left the money he hasn’t spent at the end of the month in his current account. I asked him how much he had saved? He answered that he hadn’t saved a whole pile. I asked him how much he expected to save in the next 12 months. He didn’t know.

I then described the simple steps that I thought he should follow and the rationale behind them. While I know at the time he thought I was being a bit over the top, he thanked me for my advice and said he’d think about what I’d said.

I didn’t think any more of it and I was taken aback when some months later, he brought up the conversation we had again. He had fully implemented what I had outlined and he reaffirmed my belief in what I had said. This is what I told him:

The basic premise of the below process is that there is some amount of your net income which you can set aside. I believe that nearly everyone should be at least be able to put something away, no matter how small. Obviously for various reasons including but not limited to: education, debt, dependents and unemployment; the below steps are not applicable.

I would recommend targeting 25% – 30% of your net income but start with whatever works for you. The fundamental point here is to establish a habit. The amplitude of your savings amount can be altered as a secondary activity. Even if you are only saving 5% – 10%, that is enough to start with.

To be precise, net income here is gross income less taxes, I’m estimating that 75% of net income is sufficient for food, rent/mortgage, bills and other discretionary expenditure. The only callout I would make is that if you have some debt then paying it off should be your priority. Short term debt such as car finance, credit cards, overdrafts and personal loans are typically offered at juicy interest rates so fully paying this kind of debt off first is prudent.

Enjoy life but be disciplined and realistic. Achieving a savings target should not be at the cost to your lifestyle, is missing that gig or not going on that random session with friends worth hitting 30% every month? No it’s not. Like everything, it’s about achieving a balance between short term pleasure and long term satisfaction.

If you have to physically transfer money to a different account every month, you will find an excuse not to. Set up a standing order or direct debit. You might think, I’ll do it next month. You won’t. Do it now. In three months time, you will be grateful.

If you have ticked the box on the above steps, congratulations! This is the primary and probably the most challenging step. Now that you have established a savings habit, you should try and scale it up. So maybe you are saving 15% of your net income, can you try and get this to 20%?  The trick here is build a system which you can scale as your income grows.

Let’s say you get a raise, what’s the most likely thing you do? Spend it. Or maybe you have got that new job you have been working towards and have a few more shekels making their way to your account at the end of the month? Do you really need to spend that money? Can you divert it straight to your savings account?

In summary, the baseline target here should be that if you receive an increment of 10% then you should be aiming to increase your monthly savings amount by at least 10%. Otherwise you are effectively reducing your monthly savings percentage.

At the end of the day, it’s fine to splurge some of your hard earned savings. It’s your money! The point of this post is to help you build a war chest not dictate what that “war” should be.

In closing, frugality is the best defense against uncertainty and this system encourages you to adopt frugality.

In a worst case scenario, if you lose your  job or have your income reduced, it provides a platform which you can pivot from.  The variables in the equation are how much you can put in and how soon you can start. Time is a constant. It will not wait. Get it done.