Several weeks ago, I invited new email subscribers to share their answers to two deeply personal questions:
What’s your wildest dream, and what’s preventing you from getting there?
The answers poured in to a degree I couldn’t believe. My Inbox flooded with hopes and sorrows. Some people shared brief-but-honest answers; others wrote memoirs. People from all walks of life and all corners of the globe responded. While each person’s dreams and obstacles are unique, a few common threads emerged.
One of those common obstacles stemmed from an inability to save. The stories sound like this (paraphrased; no identifying info):
- “I’m in my 50’s and I’m woefully unprepared for retirement. How can I catch-up now that time is running short? My 60’s are close, and it scares me.”
- “I’m 25 and I’m overwhelmed by how expensive adulthood is. Between paying off my student loans, planning a wedding and hopefully buying a house, I don’t know how I can pay for it all. I want to travel, too, while I’m still young, and I’d like to start investing, but I don’t know how I can cover all of that. I make $40,000.”
- “I’m taking care of my elderly parents and two children. I’d like to earn more, but its hard to boost my income when I have so many family responsibilities. I’m in debt, and I need to save more money so I can be prepared for my own retirement.”
The answer to these questions, like the answer to all personal finance questions, can be boiled down to three words: Grow the gap. There’s a chasm between “what you earn” and “what you spend;” make this as wide as possible.
At the risk of sounding like Captain Obvious, the only two ways to widen this chasm are by earning more (side hustles; real estate; investments) and spending less; today we’ll focus on the latter option.
The easiest way to spend less is by adopting an anti-budget: Yank your savings off the top, go wild with the rest. As long as you’re saving 25% or 45% or 75% of your income — (whatever number you choose) — you can spend the rest guilt-free.
When you’re handling “the rest,” that spending money, you’ll obviously first pay your bills; you can spend whatever’s leftover on sheer ridiculousness to your heart’s delight. Order a 2nd martini and relish that $100 filet mignon. You’ve yanked your savings from the top first; the rest is YOLO money.
“Sounds awesome. How much should I save?”
Twenty percent is the bare minimum — that’s enough to pad your retirement accounts (10-15%) and emergency fund (5-10%), but not much else. (I’m assuming you’re debt-free, except the mortgage.) I’d consider a 20% saver to be a Financial Awesomeness Novice, which is fine, since we have to start somewhere. (That’s where I started, during my first 9-to-5 job.)
(Wow, I put a lot of parentheses into that last paragraph.)
(Okay, now I’m just out of control. Whoa!! (!!))
Fifty percent or more is ideal. To rephrase that: Save half. That simple two-word directive is the road towards dazzling yourself with how carefree and easy your life has turned out. (Will and I have been saving between 55 to 77 percent of our income for the past several years.)
Remember when you were a little kid, and the grown-ups cautioned you that adulthood is stressful? Hogwash. Total baloney. Being a grown-up rocks. The world is your playground. Everyday is a field trip. And all of it — all of it — is brought to you by saving half and investing that moolah into passive-income-assets like index funds or rental properties.
Most of you have accomplished much harder tasks. You’ve learned calculus and chemistry. You mastered a foreign language or a musical instrument. You read Dostoevsky. Heck, you learned how to spell “Dostoevsky.” Or, for that matter, how to spell “Mississippi” and “hippopotamus.”
The road to financial independence is far simpler. You invest in index funds and/or a handful of properties, lather/rinse/repeat, and voila, life is awesome. It’s easier than studying mitochondria.
“Okay, you make a convincing (rose-tinted, but convincing) case. How do I save half?”
If you’re single, the sole breadwinner, or a couple with separate finances, automatically direct-deposit half of your paycheck(s) into a savings account. From there, transfer it into investments, your emergency fund, or debt payoff.
If you’re a dual-income couple with joint finances, ask yourself: Who earns more? Whomever that person is, automatically shoot their entire paycheck into savings. Live solely on the other person’s income. By definition, this guarantees you’ll save more than 50%.
This also sets you into a sustainable mindset: You’ll buy houses, cars and enter other obligations with the mental framework that you’re living on one income. If you later decide to drop down to a one-income household, you’re ready.
(Many of my friends are buying their first homes. When they ask for my advice, I urge them to assume they’ll become a one-income couple in the future, and pick a home based on that budget. It’s fantastic if both partners choose to keep working, but why not give yourself the option to quit? Plus, if one person loses their job, you’ll feel cool as a cucumber.)
“Great tactics. But you’re jumping the gun, Paula.
“I’m not asking how to divert money; I’m asking how to find it. I live frugally. I’d love to save more, but I have no flippin’ idea where else I can cut back.”
Enter: the One Percent Challenge.
The premise is simple: You create savings one percent at a time. If you currently save 10 percent of your income, save 11 percent this month. If you currently save 25 percent, save 26 percent this month. Next month, notch up by one more percent. The following month, repeat. You’ll be saving an extra 12 percent, above-and-beyond your current rate, within a year.
(To calculate one percent, lop two zeros from your monthly pay. If you earn $4,000 per month, one percent is $40. If you earn $8,000 per month, it’s $80.)
A whole bunch of Afford Anything Rebels started this challenge in January. (If you didn’t, or if you’re new here, join us! No day but today!) We’ve started a Facebook group, and I’m awed by the innovative ideas that the Rebels are sharing. Let’s take a peek:
- Use Google Voice or Skype instead of Verizon, T-Mobile or any other major cell phone company.
- Pay car insurance annually or biannually instead of monthly. One reader is saving $100/year through this move alone.
- Tether your devices to your phone’s data plan (if you have unlimited data). Slash your entire home internet bill.
- Calculate how much less you’re spending on gasoline, now that fuel is cheaper. Move this to a savings/investment account.
- List one item on Craigslist or eBay per week.
- Use Billcutterz to negotiate lower bills on your behalf. If they succeed, you each keep half. (Not an affiliate link; I never affiliate to something unless I use it myself).
- Use Acorns to “round up” the change from every purchase. Invest this money automatically. (Not an affiliate link; I haven’t tried this yet.)
- Use Digit to analyze your spending habits and automatically transfer small amounts of “you’ll-never-miss-it” money into savings. (Affiliate link; it’s a free service with a “no overdraft guarantee.”)
- Save every $5 bill that comes your way (you could also do this with $1 or $10 bills). Put it into a jar or envelope, and deposit when it’s full.
- Find a location-independent freelance gig and save 100% of that income. (This is how I paid for two years of world travel, back when my full-time salary ranged from $21,000 – $31,000).
Here’s what Will and I have done recently:
- Switched to a different health insurance with a lower monthly premium. Will’s premiums dropped from $302/month to $197/month, and the savings goes to the HSA account.
- Switched to a different natural gas plan.
- Started using Digit to automatically transfer small amounts (that I don’t notice or miss) into savings.
- Became far more organized with bookkeeping, which should help me optimize legitimate write-offs during tax season. (I use Less Accounting, which is designed for people who ought to be using Quikbooks, but would rather jam a rusty fork into their eyeball. BTW, not an affiliate link; they don’t have a referral program. I just enjoy them.)
Join the Facebook group, take the One Percent Pledge, and share how you’re trimming your budget — one percent at a time.
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re:Ecuador- I’m super pumped I got in this year! Cheryl has promised many fun activities from the sound of it, plus bonus birthday celebrations for you and me! I think this will be one of the best presents I’ve ever given myself 😛
@Gwen — It’s your birthday too? Birthday twins!! I can’t wait!!
The effect of going through your monthly bills and finding ways to decrease them or eliminate them altogether is enormous. Most people, including myself at one point, just pay their monthly bills without giving much thought to them. But just a cursory glance at where your money is going can be very profitable. In my case, gym membership gone, car insurance bill cut in half and cable bill negotiated down. Just these three things saved me $300/month.
And the next most important thing is to actually do something with that money and not let it just sit in your checking account. Increase your 401k or IRA contributions or pad your emergency fund. After a few years of this, your net worth will be going up up and away.
Paula,
I’ve never had a budget so I like the “anti-budget” idea. I think it is something a lot of my friends who insist it is impossible to save might be able to start righting the ship.
My issue now is I’ve gone FIRE and my savings rate has plummeted. I’m trying to keep it at at least 5% to make sure I can outpace inflation. Saving more is truly going to be difficult for me so the focus is on improving the income side!
Great reminder Paula!
I’ve definitely been guilty of the “latte factor.” I think it just boils down to how we look at things. Sometimes, our views are heavily influenced by how we grew up.
Personally, I was never taught to save. As a kid, my father taught me to work if I wanted to buy something. Though, my financial education stopped there. It was all about earning money but not preserving it. Unfortunately, his passion for working didn’t leave much room for family time. To this day, he still can’t fathom the thought of working less to have more time to live a better lifestyle. Maybe it’s just a generational gap!
I enjoyed the write-up. Nice to hear about the Facebook group, I’ll check it out! 🙂
I am really good with saving only because its taking out for me on a monthly basis and in an account I cannot just go and withdraw from. I believe that people have to figure out what works for them and make it up in their mind to make a change. You will make saving a priority for yourself when it becomes a priority.
Does anyone know if we can claim this trip as a tax write off? also, will we learn a tnt New ideas that are different from reading the blogs?
Great article!
I’m just curious what you mean by a location independent freelance gig?
Thank you Carolyn!
A “location independent” job is one in which you can work from anywhere on the planet, as long as you have an internet connection. You don’t need to physically be located in one spot, such as Boston or San Francisco or Kansas City, for the sake of your job. Graphic design, article writing, programming, online marketing, phone-based coaching, blogging — these are all examples of location-independent work, although they’re not a comprehensive list. You could do these jobs from Aruba, the Bahamas, Italy, Thailand … anywhere you prefer.
By “freelance gig,” I’m referring to working as a self-employed contractor, rather than as the employee of another company. This gives you maximum flexibility in terms of your hours, location and level of commitment.
Here’s an article I wrote about the drawbacks of this lifestyle (and why I still choose it, regardless): http://affordanything.com/2014/08/21/the-secret-truth-about-the-digital-nomad-lifestyle/
Hey Paula,
May 23 is a Saturday, not Monday. Can you please clarify the date of the Meetup? Depending on the day I may actually be driving through Atlanta and would love to grab a pint.
@Kyle — Oh crap, I meant March!! Whoops!! The meetup is on March 23 — tomorrow. Sorry about that!
The #1 way to start building wealth is by STOPPING to accumulate debt. Think of an old-fashioned paddlewheel boat that doesn’t use brakes to get it to stop; First it has to reverse its momentum by stopping the paddlewheel and then putting it in reverse to gain energy to go the other direction.
So it is with debt — if you continue to use consumer debt as a crutch, you will NEVER be able to gain traction to go the other direction and start building wealth.
Ditch the debt-loving lifestyle, and watch your fortunes change!
@Mary – Assuming you’re referring to consumer debt (as opposed to, say, getting a mortgage), then yes, obviously you should stop spending money that you don’t have on consumer junk. (I’m referring to the general “you,” not yourself in particular.)
Then you use savings to repay that debt and build an emergency fund, which protects you from needing to go into debt in the future. After that, you start investing. (The only investing you should still do while you’re in debt is getting a 401k employer match).
I like your “Grow the Gap” advice. In this country, you have to do it yourself. Otherwise, if you are getting older, not saving and investing, your mortgage or rent is too much and you have a loan on anything that doesn’t appreciate, you have to initiate serious change because are looking at a stark situation when you get older, or working forever. Scary to think how a whole generation of Americans is saving zippo and will one day be facing very real and dramatic lifestyle reduction. Better to face it now and Grow the Gap so you have a fighting chance when you can no longer work.
Personally I like to budget for everything so I’ve been able to keep my goals on track. I love to travel so having a set budget means I’ll never go into debt just to enjoy things.
I think breaking down savings into percentage amounts is such a valuable exercise. It’s so easy to assume we’re saving “enough,” but when you calculate the actual percentage, it feels much more tangible and motivating.
We save about 71% every year, which I realize is on the extreme end for many folks. But, like you said, even saving 20% is a great start. Just having the realization that you can save more is inspiring, in my opinion. We made it something of a competition with ourselves–could we bump our % higher every month? Turns out, we could!
I somehow get your email posts and I do read and enjoy them. People with common sense are rare these days. You found Will and Will found you and together your money wisdom is personified !
I am flush with more than I’ll ever need, after that it goes to kids who want music scholarships at FGCU.
( Florida Gulf Coast University ) – My personal philosophy mirrors yours and I’m here to tell you it works !
I’m 75 and from the old school of “Live within your means ” – old age is great when you can live well and not
worry about how to pay the next electric bill. You are doing a great job and a great service to youngsters who
do not have a damn clue about life and or savings for the future.
You guys deserve a medal !
Warmest regards,
Frank A.
This is a great motivational article. I hope it helps people realize there is not one path to financial independence, but many different ones. The main problem people have is not starting now!
I think about where I am now in comparison to 5 years ago and it is like night and day. Even with being married and having two kids now I feel like I have a lot more cash because I have changed my habits and put saving first!
Hey Paula – another online accounting platform is Waveapps.com. It looks to be similar to LessAccounting – but it’s FREE. No limits on invoices or other features on it.
I help business owners run good businesses for a living, and I love this little website. It’s easy to set up and use, and you can invite collaborators to work your books with you. I’ve recommended it to lots of folks (and I receive no compensation for this, FYI).
Check it out! And if you need some help please let me know.
@MarciaB — That’s an awesome tip! I haven’t heard of them … I’ll check them out!
Paula,
Does Less Accounting handle your accounting for your rental properties as well? I have several properties and have been looking for a way to get these more organized without burdensome accounting costs. Thanks!
@Cameron — Yes, they do! I recently started using them for my rental properties, so my experience with them (for this purpose) is limited. So far, so good. They allow you to “tag” expenses, which makes it easy to tag/differentiate between multiple houses, as well as differentiate between repairs that are immediate write-offs vs. renovations that need to be depreciated over many years.
I decided to “upgrade” to their bookkeeping services for $125/month per business, which is optional. You don’t need to use this, but I choose to because it saves me a few hours each month, and gives me additional documentation that (I hope) will be helpful if ever get audited.
(Note: I just started using them for rentals, so my experience is really limited … I’ll have more to say about it six months from now.)
Next year I think we’ll be spending 100% of our wage income (which will be 3/4 of what it usually is), but we can do that because of a high savings rate in the past. It’s nice not having to make sacrifices because of having grown that gap in the past.
Great tips on getting started on savings. I like your idea that as long as you’ve got a certain percentage of savings the rest is “yolo” money. Not entirely sure if that’s true, but a fun way to put it.
All great advice.
As a new parent and newly single income family, I’m glad we are naturally money cautious and as a result can still live in Silicon Valley and pay our mortgage and other bills on one salary while raising a child and saving for retirement.
While I’m glad I refinanced into a 15 year mortgage a few years back to force our faster payoff and lower total interest payments, I can understand why people say to get a 30 year mortgage and pay double. It would give you more wiggle room, but knowing me, I’d use it to wiggle out of savings so it’s better to be forced to save for me.
I have read your website and I honestly don’t know how to go about things.
I experienced a period of unemployment and consequently amassed debt and eventually used up all the savings I had, and sold our house to prevent repossession. With no jobs in New Zealand we moved back to the UK – with only enough money for a deposit for rent. I was fortunate to get a great job earning
I earn £2900 a month – I have a family and I am the sole breadwinner – we have 2 kids (my wife is not entitled to work). This is even a very high salary, but I struggle to save anything -actually I survive with the free overdraft. Thankfully I have no debt anymore, but I have no savings I work in London and commute in from outside. I am grateful to have a job.
£1450 is rent,
£440 is food & household.
£210 is public transport
£300 is car/fuel/insurance
£360 bills (incl. tax and I am on the cheapest rates for all bills)
£110 insurance (health and home)
£80 piano lessons for our eldest child (not negotiable by any means).
No money for eating out or holidays. But I still need to buy clothes, uniform and the odd present for birthdays etc). The rent is reasonable for London and we only have a small 2 bed house (kids share a room). We sold most of our possessions in New Zealand to pay for the fare.
I like the starting with 1% thing – its a start – but its hard to get out of ending the month at -250 to 400 EVERY MONTH! Should I just start with 1% even though I fail to get out of the overdraft and may make it worse?
I try and scrimp and save on everything but it honestly causes arguments and there is always a birthday or school trip or something. I am so stressed, as I want to be able to own a home again or at least save for the kids education and my own retirement.
Any advice would be appreciated.
Alex
@Alex — I’d make three suggestions:
#1: Your rent gobbles up half of your income. If you can reduce just one bill, focus on lowering your rent. This single move, alone, will make the biggest impact on your budget. I know you said rent is ‘reasonable’ for your area, but there MUST be something cheaper: perhaps something that’s smaller, older, or located further away. Where do the immigrants live? Where do the physical laborers live? Look for housing in those neighborhoods.
#2: Simultaneously, reduce your expenses by just 1 percent this month. Sure, it’s not “perfect,” but it’s better than your current situation. “Done” is better than “perfect.” (Do this while you’re also searching for different housing). The following month, lower your expenses by just one additional percent. The month after that, one percent more.
#3: Look for some other work that you can take on during the evenings/weekends/whenever you’re not working at your primary job. Since your wife is taking care of the kids full-time, this gives you the opportunity to work a second job, without needing to worry about paying for extra childcare. An additional 10-20 hours of work per week can dramatically change your circumstances.
Thanks for reading!
– Paula
A lack of savings is definitely a hurdle to your dreams. I personally save up to 50% of my income and that’s how I intend to make my dreams come true in a long-term basis. Saving money is the key to success.
Just like going through your old clothes in your closet, if you haven’t worn them for 2 years, it’s probably time to let them go. Same goes for expenses.
Gym membership: if you are paying a monthly membership and only meet the treadmill on national holidays, it’s time to reconsider. I ditched my gym membership and now pay for individual classes when I feel like splurging. Sure, the individual classes are more expensive. But considering that I show up once a month at $15, I’m still getting a big discount compared to my “discounted monthly membership” of $59/month.
Cable TV: I also dropped my Cable provider altogether and went with Netflix and Hulu. I used to pay more than $200 per month for all the channels I could possibly imagine and could never watch. Now I pay $39/month for high-speed internet and $17 for Netflix. I get most of the shows I like for free on Hulu and splurge on the occasional movie from Amazon or Apple TV for $3 each.
If you look carefully at your expenses, you will realize that you might be paying for stuff that you don’t need or use.
I really enjoyed this article. It made me think a lot about where my money is going and how to make saving a priority. I think in order to save 50% of your income, there first needs to be a significant change in how you view your money. For example, when you can think of your savings account not as a “want” but as a “need”. Hopefully, we can start using some of these tips in our own finances!
Wow! I’m impressed. I pay 35% in taxes and (a very cheap) health insurance plan. I live in a moderate (not no, sadly) tax state, and work hard to get it that low. Of the remaining 65% I save 65-75%. But my hats are off to the 75% savings crowd. How do you get your taxes so low? Open to ideas! Already maxing out retirement accounts etc.
Love to know everyone’s secret!!
Hi SnowCanyon —
Great question. I’m referring to after-tax income. 🙂
I lower my taxes by (1) maxing out retirement accounts; (2) living in a zero-income-tax state; (3) reinvesting back into my business; (4) hiring a CPA. But despite those efforts, taxes still consume a huge chunk of my gross revenue. I target my savings goals based on after-tax income. 🙂
Paula when you say “Yank your savings off the top, ” are you talking about our gross salary or our take home amount? I am “binge-casting” your podcast, mostly to and from work but any other time I can. THANK YOU so much for making all this real information available in a way that this 55 year old newly single woman can absorb!
Oh, just saw the comment directly above mine, where you answer this very question! Next time I’ll read the comments first 🙂