I recently increased my retirement 403(b) contribution to the maximum amount allowed by the IRS in order to benefit tax-wise. For those who don’t know, a 403(b) is similar to a 401k, and the money you put in is not taxed until you take it out during your “retirement”, when you will presumably be in a lower tax bracket.
This means I’m currently saving 34% of my gross income in the form of retirement contributions.
Of the money I actually get to see after the government takes its cut, another 14% is put into my “car replacement” account each month. Right now that money is currently making my car payment, the payment I ended up with after putting 40% down. When the car payments end in a little over 3-1/2 years, the money will just keep piling up until needed for a new car. Since I intend to keep my car at least 10 years and hopefully closer to 15, the next one should be paid for in cash. (Yes, I buy new and then drive them into the ground.)
Since I have no interest in moving to Portland, I do need a car and I think this “car replacement” approach is way cooler than trying to be cool by buying a new car every three or four years and being perpetually broke as a result. But maybe that’s just me.
Another 34% of my take-home gets set aside for the “emergencies” that constantly throw other people’s finances into chaos because they live paycheck to paycheck. The reality is that there are no “emergencies”. We all know what’s coming. The car insurance, the house insurance, vet bills, car repairs, home repairs, insane county and school property taxes (one of the few drawbacks to living in New York State) and so on. That stuff is inevitable, but isn’t billed monthly. I have it transferred directly into a bunch of ING savings accounts so it earns a little interest while I wait for the next “emergency”.
And then I live on the rest.
All told, that’s a smidge more than the 6% savings rate of the average American today, which, while much better than the zero or even negative savings rate of a few years ago, is still pretty pathetic.
But once upon a time, I was there too – pathetic savings rate that is. Some lessons are hard to learn, some get learned but then take time to implement. Going from pathetic to great savings is one of those last ones.
I’m not rich – in fact, I gross well under six figures annually. (Then again, maybe I am “rich” in a world with an average median income of $850 USD a year. Believe it or not, my income puts me within the top 3% of wealthiest people in the world. But I digress.)
I’m not sure where my savings rate places me, but I know it’s pretty good. On the other hand, Jacob over at Early Retirement Extreme saved 75% of his net income when he was working – a savings/frugality rate that let him retire at age 35. Since I’m a ways past 35, I guess I won’t be retiring that early, and that’s because of the previously mentioned lessons that needed to be learned before I could get to this point.
You know the lessons I mean:
- Stuff doesn’t make you happy.
- The thrill of the purchase fades quickly and then you want more.
- Credit card purchases are always followed by a credit card payment. (Duh!)
- Interest is not in your best interest.
- The minimum payment isn’t a nicety for you, it’s a huge profit maker for the credit card company. Period.
- The borrower is slave to the lender.
- Money management involves math and if the numbers don’t add up…well, they don’t add up.
- Debt sucks you dry.
- It’s the total cost that matters, not the size of the payment.
- You are not entitled.
- “I want what I want and I want it now” is for toddlers.
- The game is rigged.
By the time you figure all this stuff out, you’re in it up to your eyeballs. And you resolve to dig your way out. And so you try any number of schemes that you think will let you start making some headway while still buying all the stuff on your endless list of “wants”. Except the hole just keeps getting deeper, because the game is indeed rigged.
The only way out is to get out. Spend less than you earn. Stop buying so much crap. The stuff you do buy gets needs to get paid for with money you already have, not money that you expect to have next week, next month, or next year. It’s as simple as that.
And once you get out, life will be amazing. You’ll no longer rob Peter to pay Paul. You’ll wonder if somebody is sneaking extra money into your bank accounts. You’ll be able to sleep at night.
And you’ll be able to save.
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