People really aren’t that good when it comes to saving money, it seems. A CNBC piece from earlier this year highlighted that a lot of people are utterly unprepared to deal with $400 in emergency expenses.
CNBC itself cited the ‘Report on the Economic Well-Being of U.S. Households in 2017‘ which states that two-fifth of adults in the U.S. cannot come up with a mere $400 in an emergency situation. That’s depressing. And risky.
The statistic reflect a larger problem in Western societies which, in my estimation, is financial illiteracy. Most people simply don’t know how to save money and how to create a budget. Add to this the permanent temptation in our consumer culture to live above our means and you have a toxic recipe for why so many people are ill-prepared to deal with financial emergencies.
In order to prepare you for life’s emergencies, retirement and more opportunities, it is imperative that you start to save money on a regular basis.
As far as I am concerned, you should strive to save at least 10 percent of your income on a regular basis. Let me repeat this: You need to sock away at least 10 percent of your income regularly, and you need to save money as soon as your salary gets deposited into your bank account.
Why Should You Save Money?
Most importantly, you should build up your savings in order to be prepared for financial hardships and to have a nest egg to live off of when you retire.
Financial hardships can strike everyone and can come in many forms such as sickness, unemployment, divorce etc. Secondly, retirement is a huge issue and planning for it requires a lot of foresight and self-discipline. The same study I referenced above concludes that most adults are utterly unprepared for retirement as well.
According to the study,
“Less than two-fifths of non-retired adults think that their retirement savings are on track, and one-fourth have no retirement savings or pension whatsoever.”
That’s a depressing stat! If you need any extra motivation to start socking money away NOW imagine what it will be like to go to work in your 60s or 70s (if you could still work then…). Would that be a lot of fun? I leave it with you to make this decision.
How Should You Save Money?
The key is to save money consistently, not randomly. You need to sock money away every single month and automated savings plans are a great way of saving money and helping you form the savings habit.
Automated savings plans automatically deduct a specified percentage from your paycheck, say 10 percent, meaning you are forced to make ends meet with the remaining 90 percent. Since 10 percent of your income is automatically deposited into a dedicated savings account the moment you get it, you won’t even feel that you are saving money. The guiding principle here should be that you spend what’s left after saving and not save what is left after spending!
How Much Should You Save?
I always recommend people to save 10 percent of their income as soon as they get their paychecks. No excuses. 10 percent out of a $2,000 salary is just $200 a month that go straight into your savings account. That’s just $50 a week and it’s really not that much. Consider it paying yourself first!
In my experience, once you start to save money this way, it is actually quite easy to make ends meet with the remaining $1,800.
Further, once you develop the crucially important savings habit and start to see how fast your money is piling up in your savings account, I bet that you will come up with more creative ideas of how to save even more money. More often than not, people that start off with saving 10 percent of their paychecks find ways to sock away 20 or 30 percent of their income later on.
At the end of the day, it is all just a matter of priorities: Do you value consumption today more than a large savings account and financial independence tomorrow?
The choice is yours.
I cannot emphasize this enough: Saving money on a regular basis is incredibly empowering and can open up a whole new world of opportunities down the road. Not only will you see your savings grow, but you will also gain in self-confidence. You will feel a sense of accomplishment and pride. Forming the savings habit, forgoing consumption and sticking to your savings plan is a character-building exercise that will serve you well in all areas of your life.
In case you don’t know, I have developed an Excel ‘Make Budgeting Simple’ Sheet which you can download here. This budgeting sheet helps you to budget and track your expenses in order to gain control over your finances and empower you financially. Download it now, it’s free and not nearly as intimidating as you might think it is 😉