I’m a nerd for personal finance. Since around the age of 13, I’ve been invested in the stock market. I get excited when a new blog post shows up on The College Investor. And I have more fun receiving a paycheck and distributing the money strategically.
When I landed a great job after graduation in outside sales, I knew bigger and consistent paychecks were coming. I didn’t want to be without a plan for this money, and then look back and regret how little I saved.
So, I decided to make a game of how much money I could save of my after tax income. I knew the game needed to be difficult, otherwise it wouldn’t be as rewarding—like many things in life.
I asked myself, “How much money can I save and still have breathing room for my expenses?”
Note: A big part of this plan requires being financially organized. Make sure you're getting financially organized by using a free tool like Personal Capital. If you don't know your net worth or average spending, check it out on Personal Capital in about 5 minutes.
My Savings Game
First, I roughly calculated a 10% tax rate out of my income, knowing I could adjust it when I get paid and see the actual figure. Then, I did something different than most people I know. If people plan their savings at all, most subtract all their expenses and see how much savings they have left.
Instead, I did the opposite. I began with saving 50% of my after tax income. I multiplied 0.5 times my after tax income and took that total out of the sum. Then I subtracted my other expenses including food, gas, entertainment, shopping, business services (for my website), etc.
With these totals, I knew I could save a higher percentage and live comfortably. And I remembered I needed to make the savings game harder to test myself. So I said, “Let’s push the limit and save more.”
Then I calculated what my budget would look like if I saved 65% of my after tax income. I saw some extra room again and made a crazier move. I decided to save 75% of my after tax income.
If you think I’m crazy, you’re right. But, I’m going to explain myself.
Why I’m Saving 75% Of My After Tax Income
I’m not saving this much because I think money is going away and there isn’t enough out there. Besides wanting to challenge myself, I set a high savings rate for many reasons.
First, saving 75% forces me to make saving money a priority. I believe having a savings mentality is similar to a muscle that improves each time you work out. So, every month I’m getting stronger in saving money. It's front loading your life!
Although I graduated, this high savings rate causes me to financially live like a college student. I can’t make any outlandish purchases because there isn’t any room to do so. In other words, I have a built-in safety net. And at this figure, I still have money for my basic necessities.
Second, I want to save as much as possible because money represents freedom and better opportunities. For example, if you have significant savings, you can pick the job you want over the job that pays more. Or you can stop working a salaried-job altogether and freelance as you vacation around the world. Or, completely retire from work. You get the point that a war chest of cash gives you increased freedom and power.
Third, I believe it’s smart to start saving a high percentage at age 22, and then keep that rate or slowly decrease it when I have more financial responsibilities. I realize my expenses will eventually rise as I move out and pay for rent, get married and have kids, etc. But, my philosophy is to start at 75% and then if I have to decrease my savings, I’ll go down to a 50% savings rate.
This strategy is better than starting at a 10% savings rate and trying to work up to 50%, as your financial responsibilities increase.
And for disclosure, I’m investing almost all of the money I save. I set up automatic contributions with my bank that take out 75% of my paycheck and put it in a mutual fund and a Roth IRA. This helps me because it’s automatic, so I don’t have to think about manually moving the money over. Also, I’m investing because standard savings account rates usually underperform inflation.
Two Ways To Save 50% Or More Of Your Income
- Lower your budget.
It’s obvious that spending less money allows you to save more of your income. But, it’s important to highlight big savings wins—instead of cutting coupons—are how you get ahead.
For example, a major reason I’m able to save 75% of my income is because I live at home. Now before you say I’m a loser, lucky, or whatever else, understand I strategically choose to move back home during my senior year of college, before my job search started. Although I applied to jobs in other cities, my number one focus became to find a quality, high-paying job in Cincinnati, OH, where my parents live.
I forecasted my future budget and found that by living at home, I would avoid paying people’s biggest expense each month, rent. Depending on the location and size of an apartment, reasonable rent prices can be anywhere from $500 to $1,500 a month. In other words, I now can save all the money I would have burned on rent. Plus, I get some free meals and other low-cost items from being at home.
If you don’t want to or can’t live at home after graduation, there are other big ways to lower your budget.
- Split an apartment. A big savings idea is to share an apartment with multiple people (the more people, the lower the cost). This can lower your apartment bill by hundreds, which is worth losing some living space.
- Sell your car if you live in a big city. New York, Chicago, and other urban areas offer public transportation where cars might be more of a hassle than help. Beyond the income from selling your vehicle, you will also save on gas, maintenance, and parking.
- Pack your lunch. I’ve been packing my lunch to work and I know it saves me hundreds of dollars each month.
However, lowering your budget is like trying to squeeze more out of a lemon—meaning there’s only so much you can reasonably save. And it’s simply not fun to lower your standard of living. The more enjoyable way to save 50% or more of your income (and strategy I’m a fan of) is below.
- Make more money through a higher salary, or side jobs.
While you’re limited on how much you can save, the amount of money you can make is unlimited. That’s why focusing on increasing your income is a better strategy to save more. Plus, bringing in extra cash is usually more enjoyable and rewarding than cutting costs.
You might ask where’s the money going to come from? Well, there are plenty of options to side hustle.
- Get a high-paying job after graduation. If you’re in school, work hard to find internships that develop your skills. More importantly, make personal connections with professionals in your field. And if you’re going into consulting, accounting, investment banking, or grad school, then you’ll also need good grades to increase your chance of receiving a high paying job. Next, practice interviewing as much as you can (with yourself, with friends, with professors). Connecting with the interviewer and selling your value to the company is the most important aspect to getting the job and negotiating a higher salary.
- Work an on-campus job. If you’re still in school, on-campus jobs around 10-20 hours a week are manageable and productive. They’re even better if you work for the university and can use your paycheck toward tuition to decrease your student loans debt. If you can, make that transaction automatic so you aren’t tempted to spend the money going out.
- Ask for a raise. If you’re out of school and already have a job, produce excellent results for around six months and then ask for a raise. Detail how you contributed above and beyond expectations (as long as it’s true) and then see what your boss or manager says. Even if you don’t get the raise, it puts the idea in their head that you’re producing and might deserve a raise in the near future.
- Interview for other jobs. Another option is to interview while you have a job and use your position as leverage to make more money with a different company. If you’re out of college, the worst time to interview is when you’re unemployed, without an income, and looking for a job. The best time to interview is when you already have a job and income.
In addition, you can increase your income outside of your salary by working on side jobs. Many side jobs require significant work up front, but then they pay dividends and you can start to take your foot off the pedal, like the following.
- Invest in the stock market. Over time, the stock market will continue to make you money if you’re invested in a quality mutual fund. Meet with a financial planner at your major bank to see what portfolio works best for your situation.
- Start a major project. You can make thousands of dollars each month from creating a blog, YouTube channel, podcast, book, company, non-profit, etc. While it will take time in the beginning to create something of value and gain an audience, these projects can bring money as you sleep.
- Tutor. If you’re in or graduated from college, then you’re qualified to tutor. Reach out to peers, people a year or two younger than you, or even high schoolers and tutor them in a subject you’re good at. Freelance this tutoring without an organization and set the rate of your value. For example, I made $25 an hour in college for tutoring a guy in the Law School Admissions Test. I initiated it after I heard he was studying, and it worked out.
I acknowledge that most of these options to make more money are not described in depth, but that’s because this isn’t the primary point of this post. The main idea is about financial responsibility.
Although in this post I talk about saving exactly 75% of my after tax income, I don’t want you to walk away with the lesson that you need to save a certain percentage. I realize I’m fortunate to have a high-paying job for my age and no rent expense, which both allow me to save more. Also, I understand everyone’s financial situation is different.
The biggest takeaway from this post is for you to focus on achieving financial responsibility through logically saving a good portion of your income.
For example, it’s not financially responsible to save 50% of your paycheck if you’re checking your account at midnight to see if you have enough to pay for your electricity, credit card, or rent bill. Give yourself some breathing room and build your savings percentage as you go. Contribute to a retirement account and an emergency fund.
Don’t get lost in trying to save a certain percentage you read online. Instead, continue to build the habit of saving and improve your percentage as you lower your budget or make more money. Take action for your future financial success and freedom.
Through personal experiments and studying top-performers, Brian Robben believes anyone can be successful by learning and using the right strategies.