Budgeting Basics: Save At Least 10% of Everything You Earn

by mzumtaylor on January 6, 2011

in Budgeting,Personal Finance,Saving

After a week break for me to get some things in my life sorted, we’re back to the Budgeting Basics Series.

Today we’re going to be talking about saving.

Saving: Why It’s Important

No matter what age you are now, at some point in the future, you’re going to want to stop working and retire. Unless you were born to a very wealthy family, or are scheduled to inherit some vast riches when an older relative passes away, saving money is the only way you can accomplish your goal of retiring. (Bear with me, I know that’s a very broad statement. Investments and other things factor into saving for retirement, but the point is, savings come first.)

And if retirement is too distant a goal to encourage you to save, consider that saving is the only way you’ll be able to buy a house, or a car, or a gaming system, or a new cell phone, without going into debt. And going into debt is bad, for the most part.

The point is, saving is a good idea.

Why 10%?

“Save 10% of everything you earn” is the advice my mother gave me growing up, and it’s the advice her grandmother gave her growing up. It’s good, solid advice.

Why 10%? Because it’s a big enough amount to make a difference without straining your income too terribly if you don’t make very much. 10% of $100 is $10, which leaves you with $90 to spend. Odds are, you’ll never really miss that $10.

The only catch is, you should save 10% of every amount of money that comes into your life, not just paychecks. If your grandma gives you $50 for Christmas, you should put $5 in savings. If you get a $20 tip on a job, you should put $2 in savings.

Ideally, you should save 20% of everything you earn, or more if you can afford it, but 10% is an excellent place to start.

How to Save that 10%

The simplest way to save money is to get a jar or a can and label it “Savings” and stick 10% of all the money you get into it. If you’ve got the self-discipline to leave the jar alone, the money can add up pretty quickly.

The more common way to save money is to open a savings account in the same place you have your checking account. Often you have to have to have a certain amount of money (between $50 and $100) to open a savings account, but that’s where the jar/can scenario can come in handy.

    Personal Anecdote:

    The summer between my freshman and sophomore years in college I took a job renovating dorms on campus. It paid a decent wage and offered 40 hours a week, which was nice.

    At the time, when we got our paychecks, we could take them to the bookstore and have them cashed. I didn’t have a bank account yet, so that’s what I did.

    Every two weeks, when we got paid, I took the cash from my paycheck and I split it into three piles:

    • The first pile of money was 50% of my income, which I used to pay for groceries and beer and the like. (Didn’t have a car, housing and one meal a day was paid for by the college, and so on… not a bad gig, all told.)
    • The second pile of money was 20% of income, which I stuck in a manila envelope under my desk. I was saving up to open a checking account at the local bank.
    • The third pile of money was the remaining 30% of my income, which I put in another manila envelope under my desk. I was going to use that money to open a savings account at the local bank, and start saving for the study abroad trip I was going to take to Japan my junior year.
    By the end of the summer I had saved $1,900, which broke down into $760 for my checking account and $1,140 for savings. Not bad for three and a half months work.

The other option, one that I use now, is to open a savings account at an online banking institution, like INGDirect (the one I use) or Ally Bank. INGDirect has savings accounts with interest rates of 1.04%, and Ally has accounts with interest rates of 1.27%. Most brick-and-mortar banks offer .054% interest in their savings accounts, if that.

If you don’t already know about interest rates and why they’re a good thing, stay tuned for the next post in the series where I’ll talk about investing and compound interest and why it’s an awesome thing.

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