A couple of blog posts ago I mentioned that just over 50% of the money I make goes into savings. I will now explain how I managed to engineer that on a moderate income.
Saving 50% of your income sounds near enough impossible for most people I know, and I don’t blame them. Looking back at the last few years, I would probably think the same. And yet, for over a year now I have been putting over half of my income into savings, and for the most part, leaving it there.
The road to re-engineering your financial situation to be able to save large part of your income starts with two things. The first thing is a budget – you must have one to direct your money. The second one is the ‘pay yourself first’ approach.
Before you can hit the 50% or higher saving rate, you will need to get rid of your consumer debts such as credit cards, car loans, store cards etc first. If you are in debt and saving instead of reducing the debt, you are in effect building a house on top of a sink hole. If your leg slips and you lose a job or your income decreases, your savings will have to be used to service your debt instead of working for you – not what you want to happen.
For the purposes of this post let’s assume that you are debt free, maybe except your mortgage which usually takes a while to pay off, and you are ready to start putting some serious money away. Whether you just keep it in a money market account, invest into something or stuff a mattress with it, is entirely up to you. Please do not stuff a mattress with your savings though, there are better things to do with it out there. The first thing you will want to do is to edit your budget in a way that makes you pay yourself first.
‘Pay yourself first’ explained
Paying yourself first doesn’t mean giving yourself some cash to go shopping. It means putting your long term needs first and ensuring that you are meeting your goals before tackling anything else. Your needs might include saving for retirement, saving for a house or ensuring you have enough in your pocket to go on that once-in-a-lifetime trip around the world which will take 3 years to complete. Whatever your big goals are, that’s what you should focus on. For a person on a moderate income this does mean that you will most likely be squeezing down your living expenses, buying less stuff and making money on the side. Why? Because your long-term goal is worth working hard for.
You might think me a little extreme, but when I compare the prospect of not dying a poor old cat lady against spending all my cash at a party, I am choosing to be a rich old cat lady (who travels far and wide and drives a classic Mercedes with a hydrogen engine because she’s a fancy old bird). It doesn’t mean that while you are saving a chunk of cash you will miss out on things or all your friends will abandon you. It does however mean that you will start saying no and deciding for yourself what is important to you first and foremost.
And practically, how does paying yourself look like?
This is how I do it. My salary is paid on the last working day of a month. Before it hits my account, a portion of money known as salary sacrifice alongside a standard pension contribution are deduced pre-tax and sent to my workplace pension account. Next, on the first working day of the next month, four automated transfers follow from my taxed income. One goes into a cash ISA, one goes into stocks & shares ISA and one goes into a 5% time-limited savings account (the account is limited to £250 per month or £3000 in the space of one year). The fourth one goes into a small pension pot separate to the one paid through work. Although I pay myself first, I treat that money as if it was never there to ensure I am never tempted to stop it from going places.
Aside from these four transfers, my key bills such as mortgage, electricity bill and travel card purchase also go out on the first. Whatever is left in my account covers everything else from food to Uber. The key action with this leftover money is monitoring it closely, because when it runs out, I am having a no-spend week. It is therefore important that I budget according to my needs and keep these modest. You might be surprised to know that majority of millionaires lead modest lives – the truth is that the more you flaunt your cash the less of it is working for you in the background.
So forget FOMO, YOLO and social pressures, and do what is right for you. If it means saying no sometimes and meeting your friends for coffee and cake instead of a fancy 5-course dinner, then have your cake and eat it. (bad pun intended).
Next week I will tell you a little bit about cash envelopes system – one of the most cringeworthy yet incredibly effective ways of managing your everyday spending.Take Our Poll