We all know the Richest Man In Babylon and the Automatic Millionaire approach to getting rich (very slowly, and if we ignore inflation … you wish!): simply save 10% to 15% of your gross salary …. and wait.
But, that sage advice is doled out like just something that you can easily do …
… but, there’s a couple of problems:
1. It’s not so easy to save that much if you’ve got a stay-at-home spouse, three hungry kids, a car loan and a mortgage to ‘feed’; I mean, not everybody started reading personal finance blogs in their diapers [AJC: that’s when they start writing them! 😉 ], and
2. It’s not enough: inflation, financial crisis, work crisis, home crisis, etc. all ‘eat’ into your savings and decimate your Save 15% Until You Die Or Retire Whichever Is Worse plans.
Fortunately, I have a solution to both problems:
We solve the first problem by remembering that ago old adage / riddle:
Q: How do you eat an elephant?
A: One bite at a time!
It’s the same with savings: set your target at 15% of your gross salary, then make a start by saving just 1% more than you are saving today. If you’re currently saving nothing, then I guess you’re now saving 1% … infinitely more than before 😉
As often as you can, but no less than monthly, increase that savings amount by 1%. Repeat until you reach 15%.
In Australia, we have $1 and $2 coins; I just automatically throw these in the center console of my car. Last time I checked, there was $50 or $60 in there … if I were poor, I guess I would trundle off the the bank and deposit that in savings account, until I had accumulated enough to add to my 401k.
You probably won’t even miss the ‘lost’ spending money …
Then we can solve the second problem by saving even more; here’s how, and you won’t even feel it, I promise:
You only save more when you are allowed to spend more!
It’s a trick that I taught my children: when they get money (any money: an allowance, a gift, find it on the street, etc.) half goes into Spending and the other half into Savings.
So, too, does it go for you: anytime that you get any additional money [insert ‘found money’ methods of choice: a pay increase, a second job, a windfall, loose change that you save out of your pockets, a gift, a manufacturer’s cash rebate, tax refund check, etc., etc.] you Spend half and you Save half.
Over time, you will find that your rate of savings goes up tremendously … and – almost – painlessly (because you get to spend the other half)!
Of course, there is a third solution: simply contrive to earn more money from businesses and/or investments such that your savings won’t make any difference to you …
… but, I encourage you to try my “eat the elephant” Making Money 101 strategies as well because the money that you have saved will help you to fund these ventures – with enough left over to ensure that you have a safety net of some sort in case your plans don’t work out; and, even if things don’t work out the way you expected, if you followed those basic guidelines, you’ll probably find that you’re still better off than 90% of your neighbors 🙂
Adrian, what’s the disadvantage of saving 100% of that windfall, increased salary, etc..etc..and keeping your lifestyle the same and not increasing it, as apposed to saving 50% of it?
Particularly if you don’t have nearly as much of a desire to spend more money at the moment, your satisfied with your home, cars, clothes, eating out rate, at the moment etc..? Is there some other negative ramification that comes from this?
@ Scott – Maybe yes, maybe no … to me, money is for spending: some now, some later. The trick is to smooth out an uneven supply to fulfill an ever-increasing demand. If you’ve got nothing you really want now, do what my kids do: put half into ‘saving’ and half into ‘spending’ and if you do happen to find a doodad that you really want (after applying 10-1-1-1-1 and 10-10-10) and the money is sitting there in ‘saving’: go for it! In the meantime, your ‘spending’ account makes for a nice ’emergency fund’ ….
Saving money is all about having a habit. Once it becomes a habit you don’t even realise it is gone.
Just like you Adrian I automatically empty my 1$ and 2$ coins into two Money boxes. Probably in the last 2 years I have saved over $1500 in coins only.
However saving does not make you rich. Not doing anything with your money is just as bad as not saving in my opinion. Putting money in the bank is no longer safe, inflation eats up and interest rates fluctuation means literally zero return after tax.
@ Norm – Gotta be a fellow Aussie … agree with everything you say (of course!), mate 🙂
Could I suggest an alternative approach, which may or may not work, depending upon your personality and level of discipline?
I have a rough idea of how much I will need every month for my living expenses. I have mini-budgets (e.g. food, entertainment, etc.) within my budget. At the start of the month, I withdraw all the money for that month. Then, I try really, really hard not to withdraw anything else for the rest of the month.
In this way, I don’t have a lot of change left over because I don’t take it out of my account to begin with. If you don’t take it out of the account to begin with, then you can’t spend it. That’s my philosophy.
For me, I do actually manage to avoid spending almost any of the found money I come into. If it comes in directly as cash, then I put it aside for next month and don’t withdraw as much money next month.
@ Caleb – What you are describing is an excellent idea and seems similar to what Dave Ramsey would call the ‘envelope system’:
http://www.daveramsey.com/etc/cms/index.cfm?intContentID=3461
… all I am suggesting that you do is take the loose change from your pockets at the end of each day and throw them into a jar.
Since this is how I ‘save’ my parking money – with my ‘gold’ coins ($1 and $2 in Aus) – and silver coins for my kids tram money, I’m not suggesting anything that I wouldn’t do myself 🙂
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Adrian: I prefer to try to spend the loose change I have. I don’t mean spend it for the sake of spending it, but to pay with coins rather than keep breaking notes. It should work out the same either way, really. I guess it’s whether it’s more of a temptation to spend loose change to get rid of it or because it seems small and unimportant, or whether it’s kind of a case of breaking lots of notes by losing track of how many you’ve withdrawn and ending up with lots of change at the end of the month.
The worst thing is some of my friends here in Taiwan actually throw the 1NT coins (about 4c Australian) away on the street because they consider them so annoying! Another friend and I just about race to pick them up. Actually, what happens is that because there are such coins, things don’t get rounded off to the nearest 5NT like they do in Australia since it got rid of the 1c and 2c coins. So, my friends get 11NT change, throw away the 1NT, buy something later for 11NT, but only have 2 x 10NT, get 9NT change, and throw away 4NT. So, they’ve actually ended up paying 16NT for something that was 11NT, a mark-up of almost 50%! It may seem trivial, but they’re also the same friends who have all sorts of problems with consumer debt and live pay to pay.
Likewise, some people throw receipts away here. Receipts have lottery numbers (to encourage people to demand receipts so the government can collect tax), and the biggest prize is about 80,000 AUD, which is nothing to be sneezed at, but people throw them away still!
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