A New Year, a New Me and a New You. Lots of resolutions have been set and lots will be broken.
“How much should you save?” I ask my biscuit tin. No answer. A quick Google of “How much should you save?” comes up with a multitude rules to help you towards saving. The 50/30/20 rule. The 70/20/10 rule. The 10% rule.
…Example: Save 10%
- Annual salary – £26k
- Savings rate – 10% of net income
- Age range – starts working at 25 and retires at 65.
- Investments earn a real 5% (i.e. above inflation)
- Keith gets a real payrise of 2% (i.e. above inflation) every year.
…Example: Save a % of your payrise
Let’s say that Quentin starts work at the same time as Keith, is in the same job, gets the same payrises and invests his money in the exact same way. Spooky. But he also puts away 50% of every payrise.
Quentin would end up with a financial nugget of £644k at the end of 40 years and increased his monthly saving from £1,174 from £172. That’s a whopping 93% increase on Keith! Well played Quentin, well played.
While Keith’s savings rate has remained at 10%, Quentin’s has increased to 31.5% of his net salary as a result of saving a portion of each annual payrise. He has nearly tripled his savings rate while still spending more on himself each month.
|Barry and Keith – the 50% example|
So, if you save more, you end up with more?
Yeah, nice one Mr Zombie. Save more and I will have more money in savings, my biscuit tin could have told me that.
Yeah, that’s exactly the point. I think too often we, as a society, use our payrises to treat ourselves for all the hard work that went into achieving it. Ah sweet, a payrise, I can upgrade my car. I have certainly been guilty of spending my payrises in my head before I physically have them and I pretty sure I am not alone.
If we could commit to saving a, significant, proportion of each payrise then we are already well on our way to Financial Independence. Accelerated FI is surely a far better treat than something shiny that will give you some short lived pleasure.
Playing with the numbers
Tweaking a few of the inputs gives us some examples of how powerful this really is.
- Increasing the proportion of payrise saved to 75% – Increases the amount saved to £838k
- Increasing the proportion of payrise saved to 90% – Increases the amount saved to £955k
- Increasing the starting proportion of net salary saved to 20% – Increases the amount saved to £899k
- Increasing the starting proportion of net salary saved to 50% – Increases the amount saved to £1.7million
We could obviously massage the numbers in any number of ways, but what this has driven home is how much of an impact increasing your savings as you get payrises (and so not suffering over arching lifestyle inflation) really has. It has the power to bring forward FI or drastically increase the potential financial nugget you accumulate for retirement.
Another example, which is very encouraging:
- Increasing the proportion of payrise saved to 75% but starting at £0 per month – Will grow a nugget of £583k by the age of 65.
Hopefully this makes sense and some interesting reading, I was pleasantly surprised just how powerful this was.
I think I will name it the “Finance Zombie Rule”.
Have a good week all.
Spend less, save more and escape the Horde