Secrets of Living Happily - Live Within Your Means

Never spend beyond your income – always save 10%

Attributed to Many Authors.

In life there are three phases and you can affect two of them. The phases are, your past, your present & your future. You cannot affect the past. It has gone. The only thing you can do with your past is to learn the salient lessons from it. There are always lessons to be learned in life and therefore it is good to take the time to reflect. However with this particular phrase we’re thinking about the two aspects of life that you can affect namely, your present and your future.

Most people remain poor because they only consider one phase of the life that they can influence. They consider just the present. Therefore when it comes to money they use money in the present.

So, for example, a person gets their first job and at the end of the week they get their first pay check and they cannot wait to blow their money on some purchase. This can become a trend. A person may work for 10 years and have acquired a number of possessions and in reality have no money in the bank because they live ‘from hand to mouth’ as the saying goes.

Many people reading these words will reflect back on 20-30 years of working life and realize that they have virtually nothing saved. They have spent everything. So what is their future going to be?

As we age we begin to lose some of our energy. Some of the opportunities that we have as young people have now passed by. Do we really want to have a future where we do not have the earning capacity and yet have nothing in the bank? Is this really wise? Clearly not.

So what can we do? When it comes to money we should view what we bring home in our pay packet as belonging in two halves. The present fund and the future fund. The present fund is 90% of what is in the packet. The future fund is just 10%. Now that may sound small but a consistent 10% is effectively the international figure chosen for superannuation so it is in reality a workable figure. 10% of our wage should go into the bank. If this occurs every week and this continues to be our practice through our working life, the end result is amazing. This is especially so when it is linked to compound interest. Albert Einstein commented that compound interest is one of the most powerful forces around. While it may have been a tongue in cheek comment, he was right. Putting money into term deposits and leaving it there to mature repeatedly is a remarkable way to grow your income. Over time it can add many percentage points in income over and above the 10% per week that we put away in the bank. Interest on interest grows money. This is the proverbial money tree.

You will never see this benefit in your life if you take the view that you can spend all of your income every week. You will only see the benefit of this if you split your pay into two parts. You must have a present fund and a future fund.

What if the 10% is very small? It makes no difference. Consistency is the key. Consistent saving is the way to do this. Some people take the approach of fooling themselves as far as money is concerned by having two separate bank accounts. All of their money is paid into the one account but each week there is a periodic payment that withdraws 10% of their pay and deposits it into another account. They don’t use the other account as a day-to-day account and therefore they are not tempted to draw money from their savings. They allow it to accumulate.

This strategy is really worth the effort. Many people go into significant debt in their lives and yet this debt is avoidable. You don’t have to  choose debt. It’s true that for some larger items, like purchasing a house, then a mortgage is a debt that you may have to do take on. But it should not be part of your day-to-day strategy to go into debt. This may be what quick sales techniques are designed to encourage but it is not a wise approach and always ends up costing extra over and above any suppose savings.

A man’s working life is approximately 40 years in many countries. No matter how good the job is there are always things that we do not like. Sometimes we love what we do and sometimes we find it distasteful and hard. To go and work for 40 years and have nothing to show for it at the end is hardly a reasonable approach. However multiply 40 years by 10% savings compounded through savings accounts with interest on interest and you have a very different picture. It can be a comfortable retirement, with the freedom to do what you would like to do while you still have a reasonable amount of health to do so. Now that makes sense!

What though if you have been working for 20 years and you look at this article and say ‘well it’s too late’ It is never too late to start this process! Start as soon as you reasonably can. You will be amazed at how much of an impact this approach can have on your life. The sooner you start to put away 10% the sooner you will see the benefits and you may begin to realize that there are other things you can do to top up your future fund. Don’t delay in adopting the 10% strategy. It is the way to use money. Soon enough you will have enough for term deposits and as these roll over and start to give you interest on interest at regular internals you may be surprised at your increases. Most people are amazed.

So never look at just one area of the life that is under your control. Think about the present and the future. Plan for the future by recognizing that your pay packet is not simply designed to pay for your current expenses. Avoid robbing yourself of money by going into significant debt. You will notice that there is a section on this subject in this volume discussing the importance of “paying down debt” and this can help you to adopt strategies to avoid becoming a slave to work. Using 10% as your saving strategy will put you on the right track financially. If you adopt this as a matter of habit you will soon become very good at living on the 90%. By never allowing your lifestyle to grow to the level of your overall income you will achieve additional savings. Interestingly, it has been a consistent observation that people who really get excited about planning for the future will find additional ways of topping up the savings accounts. Thus the 10% can grow even faster and they may find themselves retiring in less than the usual 40 year working span. Who knows what your future holds if you adopt the strategy. It is worth the effort.