Save 25% of Your Income – Yes, Really
You’re here on this blog because, presumably, you want to feel like you are the boss of your money, and it is not the boss of you. That’s a noble goal and one that I support. And today I’m going to recommend something that, I think, makes you feel more like a money boss than anything else. Are you ready? OK, here it is: save 25% of your income.
Now, I don’t need to tell you that are plenty of rules out there for how to proportion your budget. One of the most famous comes from Senator Elizabeth Warren (weird, right?)—she recommends a 50/30/20 budget where you spend 50% of your after-tax income on necessities like rent and food, spend 30% on fun and games, and save 20%. That’s a very solid plan, but I prefer something a little simpler. I recommend saving 25% of your take-home income, in as automatic a way as you can, and then restricting your spending so that the remaining 75% covers it. Call it the 75/25 plan. One size fits all.
As you may have noticed, this is an ambitious goal. Looking at your weekly check and imagining 25% of it disappearing into a savings account can be quite depressing. But I am here to tell you that a) this is totally doable for most people and b) it is very much worth it.
The idea here is to work out what your basic, no frills paycheck looks like, and commit to saving 25% of it. Now, you can cheat just a little by taking advantage of any 401(k) plan your employer may offer. If your employer offers, say, a plan with 5% matching, you could commit 5% of your pre-tax income to savings, and let your boss add another 5% to that and before you can say “10% saved” you’re part of the way there. In fact, since this strategy will lower your tax bill, you’re actually coming out ahead in the saving game, especially if you still devote a full 15% of your check to savings. However you choose to do it—and more on this later—committing to saving 25% of your income is an empowering and financially powerful thing to do.
The reason that I advocate this is that it forces you to match your expenses to your savings and not the other way around. If you start with the assumption that a quarter of your check is going straight to the old savings account, you won’t miss the money as much, because you’ll be working with a 75% paycheck when you set up your budgets and think about whether or not you really, truly need that latte.
The most sensible way to approach the 75/25 lifestyle is to set up automatic deductions to your various savings accounts that will come off right when your check clears. Then, you’ll want to pare your fixed expenses down as far as you can. This means spending as little as possible on rent or a mortgage, groceries, transport and the rest of it. With your fixed expenses shaved to the bone and your savings on autopilot, any money you have left over at the end of the month can be enjoyed with a clear conscience. Embracing the 75/25 rule will set you up well to achieve your financial goals, including a comfortable retirement. Not only will you be saving a healthy amount, but you’ll also be accustomed to living carefully within your means.