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Hi everyone! Please welcome our new freelance writer, Anum Yoon! Anum has written some awesome posts for us in the past, and now she’ll be a regular contributor to Sunburnt Saver. For more of Anum’s stellar personal finance writing, check out her site, Current on Currency. Please welcome Anum to the Sunburnt Saver community! 🙂
Do you want to work forever?
If you’re one of the lucky few who landed your dream job right out of school and plan to plug away at it forever, that’s awesome. For most people, though, the idea of working for someone else for the rest of your life — braving the daily commute, fighting the good fight to meet deadlines and praying for a promotion or raise — can seem a little depressing.
If you want the freedom to choose the work you want to take on or the ability to dictate your own schedule someday, you need to get on the path to financial independence today. The good news is that you don’t have to be super wealthy to have enough money to call the shots. But you do have to become a saver to build the nest egg that will let you retire early or cut back on your work when you’re ready.
Most Americans Are Spenders, Not Savers
The personal savings rate of the average American was just 4.6 percent in August, according to the latest report by the Bureau of Economic Analysis. That’s down from June and July, but well above the meager 1.5 percent savings rates seen in 2005. Though using your paycheck to fund an amazing vacation, finance an expensive mortgage, or to nab the latest smartphone might sound like fun, saving less than five percent of your disposable income is not a recipe for success in the long term.
In fact, most financial advisers recommend at least saving a minimum of 10 percent of your income for retirement — and that’s if you’re planning to work to age 65 or 70.
What Is a Personal Savings Rate, Anyway?
If all those numbers have you scratching your head, don’t worry. Your personal savings rate is just the percentage of your net income that you don’t spend each month. If you’re living paycheck-to-paycheck and skating by on ramen noodles at the end of each month, chances are your personal savings rate is close to zero. If you have money automatically deducted from your paycheck and into a 401(k), though, you are already on your way to a positive personal savings rate.
Calculate Your Personal Savings Rate
Step one. Add up all of your income during one month. Your income will include your take-home pay (after taxes) from each paycheck, plus any other income you may earn (odd jobs, interest income from a trust fund if you’re lucky, business profits, etc.). Also included in your income total is any money that you are setting aside in retirement funds like an IRA, 401(k) or 403(b), even if it comes out of your check automatically.
Step two. Now add up all of the money you move into savings each month. This includes any money you (or your employer, if they offer matching funds) contribute to your retirement fund each month, plus any money you add to a savings account, money market, or other brokerage account that helps build your nest egg. You can also add in the average amount you keep in your checking account, too.
Step three. Take the total of your savings and divide it by the total of your net income from the first step, and you’ll get a decimal. This is your percentage of personal savings. For example, if your math leads you to .12, you have a 12 percent personal savings rate.
Improve Your Personal Savings Rate
If your personal savings rate is hovering around four or five percent, you’re in the same boat as most Americans: you aren’t saving enough, and you should do something about it.
The good news here is that the younger you are when you start to increase your savings, the better your returns will be over time when you invest the money.
Open a 401(k) or IRA
To get your personal savings rate up to the recommended 10 percent minimum, the easiest thing to do is to open a 401(k) or IRA and have 10 percent of your paycheck automatically deposited into your retirement account. When you don’t see the money, you won’t be tempted to spend it on pizza or pedicures. This is pretty painless if you aren’t in serious debt, so talk to your employer about your options.
When you have that conversation, see if your employer offers matching funds for your 401(k). This is free money that you’re not taking advantage of if you don’t have a 401(k), so make sure you make the maximum contribution necessary to receive these funds.
Finally, it’s time to sit down and figure out where to cut back your spending and turn it into savings. If you don’t already have a budget, it’s time to make one.
Add up your spending on food, rent, utilities and other non-negotiables like student loan payments. Then add up your discretionary funds to discover your spending temptations. If you realize you’re eating out four times a week, cut it back to one. If you can go eight weeks between haircuts instead of six, do it. Cutting back on little luxuries can really help boost your personal savings rate.
At the end of the day, it’s your job to build your nest egg — no one’s going to do it for you, and you’re never going to win the lottery. Armed with information about your personal savings rate, you can make positive changes to grow your savings and get on the road to full financial independence.