I’m generally not a fan of talking in terms of savings rates. There are just too many variables to make fair comparisons. I do, however, still urge people who qualify to take advantage of a foolproof method to save over 50% of their income.
If you follow these 3 simple steps, you’re almost guaranteed to save at least 50% of your income.
- Get married
- Don’t have kids
- Work and put away 100% of one spouse’s income
You might think I’m being facetious, but it’s true. As long as you have a job and an income-producing partner, you are ideally positioned for super saving.
Take advantage of your family situation
The trouble is that so many people who start out this way don’t take financial advantage of the situation.
We have several friends who had kids later in life, and yet some of them still had no savings. But we also know people who waited several years to have kids or who didn’t have any, and in the mean time they saved all of one of the spouse’s income.
Pocketing an entire income can have an incredibly powerful compounding effect on your investments and retirement savings. These are the people who have been able to buy a house with cash, get a huge jumpstart to their retirement fund, or retire early.
Regardless of whether you don’t have kids yet, can’t have kids yet, or just don’t want kids, saving one spouse’s income is often a once in a lifetime opportunity.
The trouble is that when we don’t feel constrained financially, our inclination is not to save. Many people take advantage of this period to travel extensively and to have frequent nights out on the town. I don’t necessarily discourage having a good time during the no-kids phase, I only encourage that it be done with the future in mind and an awareness of the implications.
It all comes down to what you value. If taking several years to satisfy your travel bug is worth forgoing a portion of your future retirement savings, than it’s worth it. It’s not all always about the money. It’s about your happiness, freedom, and life experience. The trick is figuring out the best way to manage those things given their close relationship with money.
A lot of people think I’m crazy for wanting to take a year off for a mini-retirement in Nicaragua. It’s something that has potentially huge financial implications, but to me it’s worth it.
I’m not saying you definitely should save 50% during your pre-child years. But I am saying that you probably could and that you should at least consider the trade-off of not doing so.
As for the rest of us…
BUT as this is no longer an option for many of us who find ourselves neck deep in the pandemonium of parenthood, there are still a lot of things the we can do to at least strive to save the hallowed “50% of your income.”
It’s not that kids are expensive. They aren’t. The opportunity cost, however, can be huge. Opportunity cost is essentially what you give up. If you’re giving up an $75K salary to stay home with kids, that would be part of the opportunity cost of having children.
Amanda and I got married one semester before graduation, me with my accounting degree and her with a graduate degree in music. I spent the summer studying for the CPA while she worked on her master’s thesis and worked two jobs. And she was pregnant. She was 7 months along when we moved to Phoenix for my job, and we decided it wasn’t worth her working for the 2 months prior to the baby coming.
We made the conscious decision to forego the temporary DINK (dual income no kids) opportunity, and our son was born on our first anniversary. Though we aren’t saving at the 50% level, there are still things we do that help us save about 30%.
A word on savings rates
But first, a word on savings rates.
I work in finance, which is all about telling a story using numbers. Since we don’t know the future, we have to make data-based assumptions. The stories we tell depend heavily on the assumptions we make. Depending on the story we want to tell, we might tweak our assumptions to be either more aggressive or more conservative.
It’s no different with a personal finance discussion. If you really want to wow people, just quote your savings rate using your after-tax income as the denominator (savings % = savings/income)… and maybe throw in your HSA, FSA, or education contributions as savings too. That’s not wrong, it just makes it incredibly difficult to compare and know where you stand.
I use gross income
When I talk about savings, I do it in terms of my gross income. To do otherwise is to fail to acknowledge half of life’s two certainties—taxes. In business classes, we often ignore the impact of taxes, but in real life we just don’t have that luxury.
In my view, if you exclude taxes in your savings rate, you might as well exclude your house payment or rent. It just doesn’t make sense to me.
How do you define savings?
When I talk about savings, I am talking about my monthly “left over” savings combined with my 401k contribution. I could make an argument for any of these three savings definitions:
- My monthly “left over” savings after all deductions, contributions, and expenses
- My monthly “left over” savings combined with my 401k contribution
- My monthly “left over” savings, 401k contributions, and kids’ education fund
Here are my savings rates using different combinations of savings definitions.
See how much your savings rate can vary depending on how you define it? I tend to lean toward #2. My reasons don’t necessarily matter since there is no right answer. It just demonstrates the fact that there is no substitute for good, clear communication.
I played a sports growing up, and I felt like I heard this line a lot: “If I were as tall as you, then I could…[insert amazing sports ability].” Kids would basically tell me that I was only effective because I was tall. I would just say “Yeah, well, you’re not.” It’s just a meaningless argument.
This relates to my fourth column. We give 10% through our church, and we always will. But that doesn’t stop me from sometimes wondering “what if.” If I didn’t tithe, we’d be saving over 50%! But since that doesn’t reflect reality, it’s not a very productive exercise.
See why finance & accounting are so fun? You can basically just use the numbers to say whatever you want. That’s why it’s critical you document or communicate your assumptions! That is all I have to say about that.
How to save
Where was I? Oh yeah. There are still things we do that help us save about 30%.
You may not see 30% savings in my bare budget reports every month due to fluctuating side income, but that’s where we’ll end up in total for the year.
Don’t forget to focus on income
There is nothing wrong with relying on a consistent paycheck as your sole source of income, but too many people fall into the trap of focusing only on reducing their expenses. There is a limit to how many times you can wash a disposable diaper or how few squares of toilet paper you can use. Focusing on income, while more daunting, can have a much more profound effect on your finances because your earning potential has fewer limits.
We are not rolling in money by any means, but there are a few things we do to pick up an extra 20% above what I make from my day job.
Improve your work situation
The day job – For most people this is the foundation. If it’s not enough, you can either focus all of your energy on building up a side business, or you can try to improve your work situation. In my case, I went back to school for an MBA and increased my earning by 60%.
Utilize old skills
Seasonal CPA job – I continue to use the skills I acquired in my preMBA days to put in a few extra hours for the first few months of each year. I have the flexibility to work remotely and to choose what hours I work.
Violin private lessons – While Amanda studied violin in college and did some teaching here and there, she never really considered having her own violin studio after we had kids. Part of her thought it seemed cliché. But ultimately she thought “why not?” She’s good at it, and she found out she enjoys the challenge.
Make yourself visible
I picked up a writing client without looking. Freelance writing wasn’t even on my radar when I started this blog, but I was approached about monthly writing job, and I said “sure, why not?” The blog has been a great way to meet new people and gain their trust. Tax and freelance writing clients, while not the purpose of this site, have been a natural byproduct of making myself more visible.
Amanda recently started working at a community college in the music department, teaching violin, viola, and chamber music. Word of her violin studio had spread, and she was approached about the job. It’s part-time, a few hundred extra bucks each month, and it’s been a good opportunity for her.
Saying you’re focused only on income still isn’t a great excuse to fail to work on reducing expenses.
There are several things we try to do to raise kids on a budget such as buying used, being open to hand-me-downs, being patient, keeping holidays simple, etc.
Before our trip to Nicaragua, I spoke with a friend about his experience living there. He told me about a couple he met when he first arrived. They were apparently in a very tight money situation and had to make their budget stretch for the next several months. So when the opportunity arose to book $95 tickets from Vegas to Nicaragua, they packed up and moved out of the country temporarily just to survive and save a few bucks. That’s obviously not a solution for everyone, but you have to admit it’s out of the box!
If I could only advise one thing to help with costs, budgeting would be it. You have to know what you’re spending in order to spend less.That’s really the only problem I have with credit cards. While I do take advantage of as many credit card bonuses as possible, it is easier to lose track of what you’re spending if you don’t consciously keep it top of mind.
Start using a spreadsheet or mint.com. If the thought of budgeting pains you, just force yourself to start. It’s sort of like exercising. Before too long, you actually start looking forward to it.
The truth about saving 50%
The next time a family tells you they save over 50%, you can give them a high five and maybe ask them for tips on how you too can achieve that kind of savings rate.
Or if you want some clarification on how they define savings, you could always ask if they calculate their rate using gross or net income or if they are including their retirement accounts.
Then you can be legitimately impressed when they tell you they are saving 50% of their gross income excluding investment accounts. If that’s the case, please tell me because I’d love to know how they’re doing it.
What are your thoughts on saving 50+ percent of income? Is it reasonable? What’s your goal?