“How Much Should I Have Saved?”
How many of us can confidently answer this question?
Throughout my career as a CERTIFIED FINANCIAL PLANNER™, I have always found it interesting that we feel guilty spending our own money. But when we think about what causes this guilt, it makes sense. Aren’t we constantly comparing our finances to our family? Peers? Acquaintances? Or maybe even someone we just follow on social media?
How much should I have saved relative to [insert whoever]?
This is a fruitless game. When asking, “how much should I have saved”, you’re asking the wrong question. Ending the comparison to others and being able to answer the question: “am I on track for my own goals?”, provides an empowering re-frame of financial circumstances.
One of my favorite stories as it relates to the ridiculousness of peer financial comparison comes from the founder of Larabar, Lara Merriken. In Lara’s interview on “How I Built This,” she discusses her decision to work an entry level job at Whole Foods in order to understand the industry she wanted to penetrate, and ultimately dominate, from the ground up.
Lara worked as a floor clerk in her hometown store after graduating from a prestigious college. She tells the story of running into high school classmates shopping at Whole Foods that looked at her in disbelief over her seeming lack of career after earning a reputable diploma.
While the lessons learned from this ground floor experience proved invaluable to Larabar’s ultimate success, how many of us have the fortitude to handle this potential ridicule from family, friends, or acquaintances?
How does this relate to me?
Having the discipline to ignore “where you should be” relative to others in life proves a challenge.
Since you are in the Driven community, I know that you are someone continuing to develop skills and expertise. Generating income won’t be a problem. The path might just be more of a rock wall than an escalator, depending on your pursuits. With Lara’s story in mind, the first step toward financial confidence is to throw the “how much should I have saved by X age” question out the window. Don’t waste energy comparing yourself to others and, instead, channel that effort toward building a system that ensures you’re financially able to meet your own personal goals.
A proper system will account for any income level and will automatically improve as your income eventually rises.
Step 1: stop thinking in $; start thinking in %
We think in terms of dollars when we are keeping up with the Jones’s. A more productive process it to focus on your pay and determine the right percentage of each paycheck that should be used toward each respective financial aspect of your life.
Step 2: what should the %’s look like?
The typical financial disclaimer exists for a reason; everyone’s situation is different! Financial planning is all about tradeoffs. Just understand if you spend more in one area, that money needs to come from somewhere else.
That being said, there are some helpful guidelines you can be thinking about:
How much of your take home (after tax) pay should go where?
Toward retirement: 5-15%
*Big advantage is if your company offers a match to your 401(k) contributions! Don’t overlook the power of this free money.
Saving and investing: 5-15%
*Fill your emergency fund and then focus on accelerating wealth with a disciplined investment strategy.
Fixed costs: 45-60%
*Be particularly mindful of the big items – housing, transportation, and kids!
Guilt-free spending: 10-30%
*One life to live.
Watch this video for a walk through of how this process works:
Importance of Savings to get on Track Financially
Naturally, the more you can tilt the balance away from expenses and toward retirement and investments, the more money will be available later. But an important principle we live by is enjoying today, while preparing for tomorrow. That is why I prefer a spending plan to a budget. In practice they are the same thing, but making room for that guilt-free spending proves critical.
I encourage you to develop your system and design it so your money flows automatically from each paycheck to its respective bucket. A little time up front will go a long way.
Over time, you can continue to optimize and improve the process as your income increases. By automating the process, you can ensure your major goals are being hit, and allow yourself to spend the spillover with peace of mind.
When working with Driven, you receive a personalized financial plan tailored to your lifestyle and goals that will not only set you up for long-term financial freedom and get on track, but will also enable you to enjoy the things that matter most to you today.
And to close the loop on Lara – after paying her dues at Whole Foods, she went on to launch Larabar, which was acquired by General Mills for a LOT of money. Those old acquaintances aren’t looking down on her now! She followed her own path, and I encourage you to do the same.