How Much Should You Really Save? Expert Advice on Budgeting and Saving
Figuring out how much of your paycheck to save can be overwhelming with so many budgeting methods available. Experts like Anita Kinoshita and Ramit Sethi offer insights on tailoring savings strategies to individual needs and circumstances, emphasizing that a one-size-fits-all approach rarely works.
The Problem with Standard Budgeting Rules
Many popular budgeting methods exist, such as the 50/30/20 rule, zero-based budgeting, and the envelope system. While these can be helpful, they may not be suitable for everyone. Kinoshita, creator of Her FI Story, highlights the confusion caused by conflicting advice on allocating income for maximum savings.
Consider the 50/30/20 rule. If you're debt-free, have zero retirement savings, and no short-term savings planned, saving 20% of your post-tax income would mean you could retire in 37 years. According to Kinoshita, "Now, 20% saved (or invested) is arguably better than 0, but are you okay with being dependent on a paycheck for 37 more years?" It shows how important it is to consider your specific situation before deciding on any savings strategy.
Tailoring Your Savings Approach
The most effective savings target is one that aligns with your life and financial goals. Instead of blindly following a trending strategy, take the time to determine the amount that best suits you. A savings plan should also take into account your job and current financial situation.
Saving $100K on a Low Salary: Ramit Sethi's Perspective
It can be difficult to get ahead on a low salary, but Ramit Sethi, author of "I Will Teach You To Be Rich," suggests a system-based approach. He emphasizes automating savings and investing over relying solely on discipline. One overspending day can undo weeks of sacrifice, especially in high-cost-of-living areas.
Sethi points out that "Fighting to save $50 a month will just amount to $600 extra a year". Instead, developing a system where you automate your spending plan, invest a monthly amount into a low-cost index fund and negotiate a higher salary can be more effective.
Implementing the Right Financial System
A well-designed system ensures your money is directed effectively. Sethi suggests opening a high-yield savings account, a 401(k), and a Roth IRA. Automate transfers to these accounts shortly after payday to streamline savings. Dave Ramsey also recommends a similar structure to make investing easier, by immediately transferring money into your retirement accounts at the beginning of each month.
Boosting Income Through Salary Negotiation
Increasing your income can significantly impact your savings potential. Sethi illustrates this by noting that "Negotiating a salary raise of $5,000 can add up to an extra $100,000 on its own over the course of 20 years." Prepare for salary negotiations by evaluating your workload, accomplishments, and researching industry benchmarks.
Conscious Spending Plans vs. Budgets
Sethi prefers conscious spending plans over restrictive budgets. A spending plan involves allocating percentages to different categories: 50%-60% on fixed costs, 5%-10% on savings, 5%-10% on investments, and 20%-35% on personal spending. This enables you to reach your financial objectives without the feelings of guilt.
