16
Save Right
Hereâs a typical morning: Iâm late. Iâm wrestling clothes onto my toddler in the doorway then launching all of our gear into the backseat of our SUV like itâs a garbage truck. At his school, heâs pulling me down the hallway like Iâm a donkey, laden with his backpack, nap-time pillow and blanket, lunch bag, snow suit, etc. Then Iâm driving home because I forgot his winter boots for recess, and Iâm doing a conference call over speakerphone. I duck into a coffee shop to answer emails and do some writing on deadline, and Iâm suddenly aware that Iâm wearing a pyjama shirt and jeans. (I need to invest in outfits that will go from day to night to day again.)
I also blurt to myself, âOh man, I forgot to brush my face today!â which means I forgot to brush my teeth and wash my face. The day is a blur. I pick up the kid and go to the grocery store to shop for dinner.
Now at this point, while my son alternates between wanting to see the lobster tank and whining for a cupcake, Iâm supposed to make smart money choices. Iâm supposed to walk the bright aisles filled with pick-me-uppers and make good decisions: do I want to save $30 for his college fund or spend $30 on cheese? Just point me to the wine.
It is hard to make the choice to save money on a daily basis. Thatâs a lot of pressure. Yes, I know, and Iâm sure by now you do too, that delaying gratification can boost happiness. It spreads out the happiness. Some happiness now. Some happiness later. The motivated, best version of me knows this and will make the right decisions. But sheâs not always around.
We have to make it easier for ourselves to save.
Make it automatic
Saving needs to become a habit. Itâs like a muscle. The more you use it, the more itâll become part of your routine and the easier it will be.
If you need to, start small. We donât start at the gym with the heaviest dumbbells. Start by saving an innocuous amount. Maybe every time you get a $5 bill, put it in a jar or envelope for your emergency fund or your travel stash or your holiday gift reserve. Start with whatever you can. Ten dollars a week. Twenty-five. If you start with $100 a month, one day, $500 or $1,000 wonât make you as unhappy because your savings muscle will already be well defined. That being said, if you want a Mr. Universeâworthy bank account, it pays to be more aggressive with your savings.
A lot of us default to saving our leftovers. We wait until the end of the month, after money has been sucked away for rent or mortgages or insurance or car payments or debt interest payments, and whateverâs leftover goes toward our longer-term goals.
I liken this to me with a bowl of chips. At the start, I think, âI need to save some of this crunchtastic salty goodness for tomorrow.â Ten minutes later, Iâm daubing at crumbs with a moistened index finger.
You need to put aside a handful of chips before you start eating. This sounds like weâre admitting defeat. Like we canât count on our future selves to be disciplined. But, as I said, saving is hard. For everyone. Most people are not active savers. We have as much eagerness about boosting savings as we do about peeling potatoes or meeting the new girlfriendâs parents.
If you set up a system where money is automatically transferred from your chequing account into a savings/investment account, you wonât be tempted to spend what isnât available. I promise that you wonât even notice that itâs gone. Do it biweekly to coincide with payday. Go do it right now. If you already do this, consider bumping up the contribution or setting up another one.
Often, the more you make, the more you spend. So, if you get that much-deserved raise, before youâve had time to adjust to your new higher income lifestyle, automatically sock that extra money away by upping your savings with the amount of your raise.
If youâre self-employed and automatic saving makes you nervous â what if money comes out during a dry spell and you need that money to cover rent? â try just a small amount. If youâre uncomfortable with this, consider saving a percentage of every cheque that you receive. (You should be doing this anyway because the government is going to be coming for its cut at the end of the year.)
Your automatic savings plan takes money out of your chequing account. And, if you remember from our chat about budgeting, you can also make an automatic transfer of money from your chequing account to your spending account. If thereâs money in my spending account, Iâm buying the wine and the cheese â and a lobster and cupcake for my kid.
Some for me and some for me
Nice figure
When it comes to long-term savings, we inevitably ask how much we need to save.
Financial planning company LearnVe$t suggests using the 50/30/20 rule: 50% of your pay should go to essentials (housing, food), 30% should go to lifestyle choices (entertainment, travel) and 20% should go to money priorities (retirement contributions, emergency savings, tackling debt, etc.).
Bleh. I donât enjoy rules of thumb. Applying general formulas to our savings strategies is as accurate as taking a magazine personality quiz. (If youâre living rent-free with your parents, for example, you can save a lot more than 20% for your money priorities.) Also, sometimes these rules of thumb can become outdated, without us realizing it.
But if you can save 20% of your take-home pay, thatâs good. Ten to 15% is good too â itâs much more than the average household is saving. (Households in Canada and the U.S. have been saving less than 6% in recent years.) If you have big, fabulous goals, like early retirement or a year-long trip to fund, then youâll need to be saving more â at least 50%.
If you heard that everyone could stand to lose exactly 10 pounds to be healthier, youâd call bullshit, look at your own circumstances and estimate a number that works for your life and your plans. How much do we need to save? It depends.
How much should you save in an emergency fund? A minimum of three monthsâ worth of living expenses or more? Well, it depends. Are you a full-time permanent government employee, or are you a freelance musician?
How much should you save for retirement? Many experts say between 10% and 15% of your earnings, starting in your 20s. But, oh, it really depends. Are you 25 or 45 years old? Do you live in a small town or the big city? Do you have a magical defined contribution pension? When will you leave your job in a blaze of glory? And will you die at 72 or rock it until youâre 102?
Argh. This is why people look for rules of thumb. To make for shorter reading. Weâll get to a number more tailored to your needs soon.
Thinking of how much youâll need to have saved can be daunting, overwhelming. Establish bite-sized milestones, such as getting to that first $1,000. Figure out how long it will take to get there and do whatever you can to get to that first stepping stone. Achieving those milestones is much more plausible than deciding to save a million bucks for retirement; that feels unfathomable. But weâre builders and weâll do it one brick at a time. Just focus on the bricks. Or approach it like that cake in the fridge. We know the cake will get eaten. One bite at a time.
The money miracle
Itâs been called magical. A miracle. The eighth wonder of the world. Youâd think itâs a monkeyâs paw that grants monetary wishes or a genuine Nigerian prince who is leaving you an inheritance, but nope, Iâm talking about compounding interest.
Your brain may have just played the sad trombone noise, but my brain popped fireworks.
What exactly is compounding interest, and why is it magical for your bank account? Think of it as interest on interest. Itâs interest on your initial principal (your original investment) and then on the accumulated interest. Doesnât sound like something that deserves a parade, but it is.
Its power is like the Force. Depending on how it is used, the power can be good or evil. It can be your friend or your enemy depending on whether you earn it or you pay it.
For your savings, time can turn compounding interest into your BFF. This friendship grows and grows over the years. It starts as this little baby lizard cradled in the crook of your arm, and then one day itâs a massive dragon able to help you fulfill your destiny and conquer lands. Letâs say you invested $1,000 and it earned 5% in interest last year. Today, youâd be earning interest on $1,050. Now, letâs say you invested $1,000 in the bank and left it to grow for 30 years with a 5% rate of return, compounded annually; even if you never added any more money, youâd have more than $4,300.
Without time, your dragon will not grow to its full potential. (To describe the phenomenon that is compounding interest, Iâm using a dragon metaphor. In my news articles, I use gremlins growing in a pool of water; fellow finance author Robert R. Brown uses zombies and horny rabbits â one zombie bites another zombie who bites more; one rabbit bones another rabbit to make 10 more who bone 10 more and so on.)
Dragons, gremlins, zombies and bunnies aside, letâs use the example of two Melissas to illustrate the importance of starting to save as early as possible. Both Melissas have $1,000 a year to invest for a certain period of time. Melissa A starts early, when sheâs 20, and stops when sheâs 34. Melissa B starts saving at 30 years old (her 20s were for concerts and travel and bottle service and definitely not saving). She puts $1,000 every year into her savings account until sheâs 64. Both make 6% annually on their investments. Who ends up with more?
| Melissa A | Melissa B |
Age when she started investing | 20 | 30 |
Age when she stopped investing | 34 | 64 |
Total amount invested by age 65 | $15,000 | $35,000 |
Who wins? | $141,700 | $118,000 |
Melissa B started late but invested more. Melissa A, who stopped saving a few years after her doppelgĂ€nger began, comes out on top. Thatâs the magic of compounding interest over time.
Even if you feel like Melissa B, donât despair. First, youâre equally as attractive as Melissa A. Second, you can make up for the time lost with some smart strategies. Just donât wait any longer.
The Rule of 72
Rate of Return | Rule of 72 |
2% | 36.0 |
3% | 24.0 |
5% | 14.4 |
7% | 10.3 |
9% | 8.0 |
12% | 6.0 |
25% | 2.9 |
Your Happy Money To-Do List
- Set up an automatic savings plan for any specific goal. Or if you already have one, bump it up.
- Look into any incentives or programs through your bank that might help you save more money.
Money Talks
- What is your biggest impediment to saving?
- Whatâs the most important thing you want to do with your money in the next five years? Ten years?