Get ready for a radical money-management idea that's becoming increasingly popular. The idea, in two words, is: "Save half." Save 50% (or more) of your after-tax income. Funnel these savings into building an emergency fund, aggressively repaying debt, and building your retirement portfolio.
At first glance, this sounds like an insane idea, but there's a small subculture of people who are saving half of their money. These savers find that the peace of mind and flexibility this generates is worth the effort, and many people achieve this on middle-class incomes. They may earn a take-home income of $100,000 per year, for example, and live on only $50,000 per year. Or they may earn $80,000 per year, but live on a household budget of $40,000.
Benefits of Super Saving
These savers are often able to repay their mortgages within five to 10 years, rather than stretching the debt out to 30 years and paying significantly more in interest. They're able to finish saving for their children's college funds when their kids are still in early elementary school.
They're able to max out their retirement accounts, pay cash for their vehicles and enjoy the comfort of knowing they have a surplus that they can tap for unforeseen events. If you're interested in trying to save 50% of your income (or at least step closer to this goal, perhaps by saving 30% or 40%), the following are a few tips.
Live on One Income
If you're a dual-income couple, the easiest way to save half is by living on one person's income while saving the other. Start by living on the higher of the two incomes. Spend several months adjusting to this budget. Once you're comfortable with this, try to transition to living on the lower of the two incomes.
By doing so, couples face an extra benefit: If you later decide to literally become a one-income couple, such as if one of you stays home to care for children, you'll be ready. Not only will you already be in the habit of living on one income, but you'll also have years of accumulated savings. You will have also made major life decisions, such as your mortgage, from the perspective of paying for it with just one income.
Boost Your Income
If you're making a six-figure salary, saving half is much more attainable. If you're making $22,000 per year, however, it's not. At the lower end of the income spectrum, people are best served by earning more. This rapidly increases your power to save half, because you can throw every dime of that extra income directly into savings.
Focus on Big Wins
When saving, start by targeting your three biggest expenses. For most people, this will be food, housing, and transportation. You may need to downsize to a smaller home. Some people have saved half by moving into a duplex or triplex and living in one unit while renting out the others. The rent from the other units covers their mortgage, so they avoid having any out-of-pocket housing expenses. If that's not appealing to you, consider downsizing into a smaller house or apartment. Not only will you save money on your mortgage or rent, but you'll also save on utilities, furnishings, and maintenance costs.
Save money on transportation by living closer to work, driving fuel-efficient vehicles, and walking or cycling if possible. Save on food by cutting out restaurants and dining expenses. Consuming a mostly vegetarian diet (or at least cutting out red meat) can also help you save on groceries. These three categories alone will generate a lot of traction toward the goal of saving 50%.
Target Your Recurring Costs
When saving, don't forget about the "invisible" expenses. It's easy to focus on groceries and gas because they're tangible. But people often forget about insurance premiums, mutual fund fees, and myriad other invisible and intangible expenses that create a big impact. Spend one afternoon per month reviewing your budget and asking yourself how you can trim these intangible costs that still consume resources from your bottom line.
Frequently Asked Questions (FAQs)
Why is it important to save money?
Saving money allows you to work toward important goals and ensure you're protected in the event of a financial emergency such as losing your job. You can build an emergency fund, save for a down payment on a house, prepare for retirement, plan for your or your child's education, and more. Because emergencies and many of life's major expenses are costly, it takes months and years of planning and saving to achieve them.
How much should I save each month?
There's no set amount you should save every month, but most experts recommend starting with 10% of your income and working toward more from there. As you build habits saving a smaller amount, it gets easier to set aside more of your income for the future. One helpful way to think about is it that you should always save enough to where it makes your budget feel a little tight.
Where should I save my money?
When you're deciding where to put the money you're saving, consider the purpose for which you're saving it. Money that you need to access should go in an interest-bearing savings or money market account. Funds that you won't need for a little while can go in higher-return accounts like certificates of deposit. Retirement funds belong in a 401(k), IRA, or similar type of investment vehicle that you won't tap for decades. Where you put your savings is just as important as how much you save.