The idea, in two words, is: save half. Save 50% (or more) of your after-tax income. Use those savings to build an emergency fund, aggressively pay down debt and build your retirement portfolio.
At first glance, this seems like a crazy idea, but there is a small subculture of people who save half their money. These savers find the peace of mind and flexibility it generates to be worthwhile, and many people are able to do this with middle-class incomes. They can earn a net income of $100,000 a year, for example, and live on only $50,000 a year. Or they can earn $80,000 a year, but live on a family budget of $40,000.
Benefits of super savings
These savers are often able to pay off their mortgages within five to 10 years, rather than stretching the debt to 30 years and paying much more interest. They can finish saving for their children’s college funds while their children are still in early elementary school.
They are able to maximize their retirement accounts, pay cash for their vehicles and enjoy the comfort of knowing they have a surplus they can tap into for unexpected events. If you want to try to save 50% of your income (or at least get close to that goal, perhaps saving 30 or 40%), here are some tips.
Live on one income
If you’re a two-income couple, the easiest way to save half is to live on one person’s income while saving the other. Start by living on the higher of the two incomes. Spend several months adjusting to this budget. Once you are comfortable with that, try living on the lower of the two incomes.
By doing this, couples face an added advantage: if you later decide to become a one-income couple, for example if one of you stays home to care for your children, you will be prepared. Not only will you already be used to living on one income, but you will have years of accumulated savings from your Save-Half era. You’ll also have made important life decisions, like your mortgage, with an eye toward paying it off with one income.
Boost your income
If you earn a six-figure salary, saving half is much more achievable. If you make $22,000 a year, however, that’s not the case. At the lower end of the income scale, people are better served by earning more. This quickly increases your ability to save half as you can put every penny of that extra income directly into savings.
Focus on the big wins
When saving, start by targeting your three biggest expenses. For most people, this will be food, housing and transportation. You may need to downsize to a smaller home. Some people have saved half by moving into a duplex or triplex, living in one unit while renting the others. The rent on the other units covers their mortgage, so they avoid having to pay housing costs.
Since housing typically consumes 25-35% of the average household budget, this instantly gets them halfway to their 50% savings goal. If that’s not appealing, consider downsizing to a smaller house or apartment. Not only will you save money on your mortgage or rent, but you’ll also save money on utilities, furnishings and maintenance costs.
Save money on transportation by living closer to work, driving fuel-efficient vehicles and walking or biking if possible. Save money on food by cutting back on catering and restaurant costs. A primarily vegetarian diet (or at least cutting out red meat) can also help you save on groceries. These three categories alone will generate a lot of traction toward the 50% savings goal.
Target your recurring costs
When saving, don’t forget the “invisible” expenses. It’s easy to focus on groceries and gas because they are tangible. But people often forget about insurance premiums, mutual fund fees and a myriad of other invisible and intangible expenses that have a significant impact. Spend one afternoon a month reviewing your budget and asking yourself how you can reduce these intangible costs that still consume resources from your bottom line.
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