Saving Right

When I talk to a person about their budget and their savings plan, I often get the question “How much should I save?” The usual answer I give has been around for a long time, and is clearly expressed in the book “The Richest Man in Babylon”. By keeping to this principle, you can start a savings program which will not be an onerous burden on your budget.

The Starting Point

Where I suggest people start their saving program is 10% of their net paycheck. Remember, there is a difference between the gross paycheck and the net paycheck. You lose money to taxes, insurance, benefits, and possibly a number of other things before you even see the check, and the remaining amount is your net paycheck. This total is the amount you need to use when planning your budget. You can increase this amount, but you need to do that after your current budget is stable, so I work with the net paycheck in the beginning.

By starting with 10% of your net pay, you are beginning a path towards financial independence, but you need to realize that you are just starting the path. Once you start this saving program, you need to move on to the next phase.

Evaluating Impact

After you have been saving for 2 or 3 paychecks, you can begin to evaluate the impact of your savings plan on the rest of your budget. You want to look at two areas of your life in particular to determine this impact.

The first impact is your debt. Are you paying your bills as well as you did before you started to save, or are your payments beginning to slip? Look at the current balance of your accounts, and not just revolving debt (credit cards, etc.) By looking at all your accounts, you can get a more accurate perspective on your debt situation.

The second area to look at is the enjoyment factor in your lifestyle. Are you enjoying life as much as before? Or is the saving plan putting a real stress on your lifestyle? Remember, your emotions are a scale on how in tune you are with your life purpose.

Making Adjustments

Once you have evaluated the impact of your saving plan, then you can begin to adjust the plan to suit your particular needs. Everyone has a unique life, and the plan that works for one person will not work for someone else. The analysis of the impact of the saving plan will tell you if you are on the right track.

Some people need to start smaller, while others need to start more aggressively. Do not let someone else’s thoughts control your savings plan. Make your own decisions. In the final analysis, you need to save as much as you can, but not at the expense of your current status and happiness. It may be that a stronger savings plan depends on other changes happening first; recognize that this is possible. The right amount of savings depends on more than just a number; it depends on how you live your life.