I recently got a raise, but it still feels like I’m living paycheck to paycheck. What should I do?
Many clients I encounter wish they had more money. Everyone has different reasons for wanting more money, but the drive for more is fairly universal. “If I could just make some more money, I could invest more.” “If I had a better-paying job, I could finally start saving for my retirement.” “With just a bit more income, I could finally start saving for a house.” This logic is all fine and good, but there are two main issues with how this logic plays out. The first issue is that it is hard to make plans when all your time is taken up by your obligations. A common refrain I hear is that “I have to take care of the urgent stuff before I can focus on the important stuff.” The second issue is that this focuses solely on income as a source of enrichment.
I was fortunate enough to hear Daymond John speak during my semester at UT Austin, and one of the best quotes I got from him that night was “More money just lets you roll up to your problems in a limousine,” and this is often the case with my clients. There is this assumption that if I just had more money, all my problems would go away. But history teaches us that this is seldom the case. For the majority of people, as their income rises, so do their expenses. Instead of more income going to retirement or savings, it goes towards nicer clothes or toys, or a house big enough to accommodate your family but small enough to keep your in-laws from visiting too often. With more income and more expenses, people are often in the same or worse spot financially than they were before.
This is where the Savings Rate can be so helpful. Instead of basing your plans around needing to make more money or being based on certain amounts, you earmark a percentage of your income that you set aside for savings and retirement. As you start to make more money, you automatically start putting more towards your retirement or other savings goals. This is a simple tool that allows everyone to take advantage of compound interest to build a nest egg over time. Before even getting into the discussion of saving vs investing, simply having the funds available grants a large degree of financial freedom and flexibility.
It is also an important barometer for how people are doing in terms of budgeting and overall financial health, and is generally benchmarked to age, both in terms of what age you start and how long you have been saving. If you start to save for retirement in your early 20s, then statistically setting aside 10-15% of your annual income until retirement should serve you well. If you wait until you are in your 50s, then 50% or more might be required to give you the total savings needed to retire at the typical ages. Even for those of you who never want to retire, it is still prudent to save early and often to cover college tuitions, down payments on a house, and the all-important nest egg or rainy day fund. Statistics abound about how we as Americans are poor savers, with less than half of all Americans having $500 in case of an emergency.
Everyone should be building towards their future, and responsible budgeting and saving plans are part of that. Sometimes all it takes to get unstuck is a little push, so I hope reading this article has inspired you to get your financial house in order.