When you talk about saving money, there are typically two ways to approach it. The first is to look at how many dollars you’re able to save over a given time period – such as a year or each month. This is helpful sometimes because it gives hard numbers to things. Everybody understands what it means to save $100. Perhaps it’s easier or more difficult for some people to save a specific dollar amount – after all, you can’t really save more than you earn – but it’s to-the-point.
A second way to look at the equation is to not focus as much on a specific dollar amount, but instead pay attention to what percentage of your income you’re able to save. This is effective for a couple reasons.
First, it genericizes the numbers. Whether you earn $20,000 or $200,000, you’re able to understand what saving 10% means to you. This can make it much easier to understand and apply principles to your own life.
Often when people read success stories of others, they’re amazed at how individuals are able to pay off massive amounts of debt or save up tens or hundreds of thousands of dollars. Their rebuttals will include things like “of course it’s easy to amass $20k in an emergency fund when you’re making $100k a year. It’s impossible for me, I only make $50k.”
These arguments focus strictly on the first method – of looking at savings as a number equal to everyone across the board. If the individuals who make these arguments instead look at the equation with a percentage view, it changes the tone. Instead of comparing salaries, they can compare savings rates.
Let’s say the individual making $100k/year has a savings rate of 25%. Applied to the lower salary, they’ll naturally save half as much. But when you don’t need to spend as much money to live your life, you don’t need to save as much, from a dollars perspective.
Understanding this concept is a key to really getting at the root of lifestyle inflation and how it can be like a weight around your ankles. As you earn and spend more money, it’s easy to see how it feels like a never-ending rat race. Sure you may be able to save more, but since you’ve got this new fancy standard of living, you now NEED more as well.
It can be deceiving if you don’t understand this. Let’s say for example that you are currently earning $4000 a month. You’re able to save $1000, for a savings rate of 25% (yes, I know this is overly simplified…deal with it). You bust your butt at your side hustle, and next month you’re able to bring in $5000. Overjoyed with the increase in income, you try to be a little smart with it. You decide to save an extra $200, and spend the $800 to enjoy the fruits of your labor. After all, what’s the point in earning money if you can’t spend some of it?
You’re happy, right? By earning that extra money you were able to save an extra $200 this month!
Except your lifestyle just inflated, and your savings rate went DOWN to 24%.
Rinse and repeat over a lifetime of earnings, raises, and lifestyle inflation decisions. It’s easy to see how you can get into the habit of thinking that you’re better off, but when your expenses increase at a rate higher than your savings, you’re in a vicious cycle that can be difficult to get out of.
Grow the Gap, Bank the Gap
The easiest way to avoid this sort of trap is to focus on growing the gap between your income and your expenses. There are obviously two sides of the coin, and depending on what kind of person you are, you may enjoy focusing on one over the other. There are pros and cons to both, and easy aspects and difficult aspects to both as well.
On the spend side of the equation, there are likely at least a few things you can do to cut down on your expenses. I was looking at our cable, internet, and phone bills this month and figured that we can probably shave about $160/month off of these expenses if we do some shuffling around. It’ll require an initial investment for some new phones, but it’ll pay itself off in a few months and then keep our expenses low. Unfortunately we’re locked into contracts right now, but I’ll make a post about this once we can make the change.
There will be people who say they have no way to lower their expenses. Generally speaking that’s a false statement. If you consider yourself in this camp for whatever reason, there are one of two things happening. Perhaps you’re either already extremely frugal (as in, Early Retirement Extreme who lives on $7k/year frugal). If that’s the case, awesome; you are well on your way and have half the battle figured out already. Otherwise, you’re not looking – or don’t want to look – hard enough to find savings.
Decreasing expenses is a great maneuver to help keep your costs down over time. Cutting out an expense can save you money in the short-term, and if you don’t go back to that habit, you save money every single month.
Income can be the fun side of the equation to impact. Seeing more money come in can be a great feeling. You’ve worked hard for that money at some point, and it’s nice to be rewarded for your work. The nice thing about focusing on income is that it has virtually unlimited potential upside. All you need is the determination and wherewithal to grow your income, and you could feasibly start a multi-million dollar business.
Just increasing income is a slippery slope if you haven’t nailed the basics yet. Depending on where you are in your journey it might make sense to start on the expenses side of the equation first.
If you’re still working a 9-5 like me, chances are pretty good that your job is your biggest income generator. While there is opportunity to increase income through raises, new jobs, and bonuses, the fact is that unless you’ve got a side hustle, you’ll likely see a more immediate pay-off if you focus on decreasing expenses.
Ninja Hack Your Savings
If you seem to struggle with savings, inching toward your goals can make it a lot easier. If you’re currently only able to comfortably save 4% of your paycheck in a 401(k) and need to contribute 24% to max it out, that extra 20% is going to hurt most likely. Don’t try to do it all at once. That’s a recipe for disaster and disappointment. Instead, start increasing your contribution percentage by 1-3% every month or two and slowly grow to hit your goals.
This isn’t a race, and it’s not a competition. Instead of looking at people and seeing how many digits their savings are, focus on how you can increase your own savings rate. The less you need to live, the less you need to save, and as you inch your savings rate higher, you’ll naturally get there more quickly.
When you figure out how much you’re saving, do you focus just on the dollar amount, just on the savings rate, or both?