Here’s the problem: the average American’s savings rate is dismal. As a country, we aren’t saving enough money, even though a few hundred bucks per month can lead to millions if you are patient. Many financial professionals recommend that you save at least 10% of your income, and at Personal Finance Genius, I’ll tell you that you should shoot for 20%.
I know, I know…. “20%? Are you crazy? I can barely pay my bills now.”
One of the biggest reasons that people don’t save money is a resistance to change their current lifestyle. Call it a lack of discipline if you will, but people don’t like fast change. It’s like this: if you drop a frog into a pot of boiling water, he’ll quickly jump out. Yet, if you place the frog in warm water and slowly heat it to boiling, he’ll sit there and burn to death.
Gruesome example, but it illustrates a point. You should treat your savings rate like the water slowly being heated. Try to save just 1% of your income for one month. If you bring home $36,000 per year, you should attempt to save $30 for the first month. Cut out one fast food meal per week, use a little less electricity, do whatever you have to do, but the lifestyle difference should be minimal. Trust me, you will not miss the 1%.
For your second month, try to save 2% of your income. For the third month, save 3% and so on. The key is to gradually increase your savings rate so you don’t notice an abrupt lifestyle change. It will take you all but ten months to reach the coveted 10% savings rate.
Another point I got from Dave Ramsey’s show is that you can start off with an average income, never get a raise, and still retire a millionaire. However, as Dave points out, if you work 30-plus years and never get a raise, you are a loser.
Because you’ll probably get a raise (or several) in your lifetime, I’d like to share with you something I learned from Brian Tracy that will help you save even more as your income increases. It’s called “wedging” and it involves building a wedge between your expenses and your income as your income increases.
Say you make $36,000 per year and you get a raise to $40,000. You should immediately half of your raise, but feel free to spend the other half as you please. When you get another raise, do the same thing. Save half and spend half. Over time, this will create a large wedge and a hefty savings account.
P.S. if you want to save more money or get out of debt, check out Dave Ramsey's best-selling book, The Total Money Makeover. It's a classic.