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Simplify Your Financial Life, Already!

One of the most frequent questions i get asked by my clients is, "How much money should i be saving each month?"

This seems to be one of life’s great mysteries. Most people have no idea if they’re saving too much, too little or just enough.

Of course, the answer to this question depends on what stage of life you’re in–someone in college may not be able to save as much as someone more established in her career, for example–and the types of financial goals you have. However, a good rule of thumb in financial planning is to put about 10-20% of your net income toward your various financial goals (i.e., reducing debt, building an emergency fund, saving for a big travel goal, planning for retirement, etc.).

Now, before you run for the door thinking you’ll never be able to save 20% of your income, hear me out.

  • First, you don’t need to go from zero-20% overnight. Actually, I recommend you don’t do this because, just like dieting, when you go from one extreme to another, it doesn’t work long term–and your savings strategy needs to be for the long term.

  • Second, the average savings rate in America is only 3.11%.1 So if you’re trying to put 10-20% of your income toward your savings goals, know that you’ll be doing way better than the average person

OK, thanks for staying with me! Now, why is saving so hard? There are a few reasons, one being that we live in a nation where over-spending is the norm. Everyone around us spends more than they earn, so why can’t we, right? Well, that’s not a great mindset if you want to become financially successful.

In my opinion, the biggest reason we don’t save is because we go about it the wrong way. Most people spend first and then save whatever’s left over. This strategy sets you up for failure. It’s too hard not to spend all your money every month. Money is very emotional and we will always find things to spend it on (I’m guilty of this, too!).

I know what you’re thinking:

“But Brittney, the designer bag was 60% off on so I had to buy it.”

I know, I know, I’ve heard it all. But the truth is, you have to learn how to resist at times. Not because I want you to squeeze all the fun out of your life, but because saving for your future is up to you–and only you.

I also know you’re smart and can practice self-control, but look, we’re all human. Why make things harder than they need to be? If you’re one of the few who want to get ahead and take control of your financial life, do yourself a favor and automate your savings every month so there is no questioning, bargaining or emotion involved with it. The automated saving strategy below will allow you to save first, then spend the rest on whatever you want–really! You can spend it all because your savings will already be taken care of for the month.

OK, let’s get automated. We’ll use Jen as an example:
  1. The first step is for Jen to calculate her net income every month. Jen makes $5,000 gross income. She is also a rock star and is already putting 4% of that into her company’s 401K plan, which is enough to get the full company match. (Awesome work, Jen!) So after taxes and other deductions are taken out, she has a net income of $3,550 per month.

  2. Next Jen calculates all her committed expenses for the month–i.e. rent, utilities, car payment, etc. In Jen’s case, her bills total $2,250.

Now the automation begins.
  1. Jen wants to put away another 10% of her income to build up her emergency fund and save for a big trip coming up in two years (I told you, she is a rock star!).

  2. So she calculates 10% of her net income of $3,550, which is $355 per month.

  3. She opens up an ING savings account for each of her goals: one account for her emergency fund and another account for her big trip. Then she sets up an automatic transfer of $255 per month into her emergency fund account and $100 per month into her big trip account. The transfers occur one day after her paycheck is deposited, so she doesn’t even miss the money.

  4. So now all Jen has to worry about is spending the remaining $945 on whatever she wants: dining out, entertainment, shoes. In essence, she can spend this money guilt-free since she’s already saved for the month. If Jen decides to spend $700 on a new designer bag, then all right. She may have to eat ramen for the rest of the month, but maybe she’s fine with that.

Now, for all of you who are already cringing at the idea of living off only $945, I know what you’re thinking: That’s not enough money! And maybe it’s not. If you feel that 10% is too much to save, start with something smaller and work your way up. Maybe you can only do five percent right now. Start there and every year increase the amount until you can reach the desired savings rate of 10-20%. The other alternative is to make more money. Check out Ramit Sethi’s Earn1k program over at his site I Will Teach You to Be Rich more ways to make extra income on the side.

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Remember: The whole point is to automate everything and make your life easier. Take the emotion out it and set up your automated savings strategy today. Check out the FREE budgeting tool TheEverygirl team created if you need more help organizing your monthly cash flow.

1. US Census Data- Personal Savings rate as a percentage of disposable personal income 1990-2010.