In nearly every financial website and book that I have read, there has always been a common thread about the need to save a significant proportion of take home salary to fund future living and retirement costs.
The exact amount varies from source to source, but a 25% savings target tends to be very popular.
Whilst I absolutely agree with the advice, the question does arise over how realistic it is for people living on average salaries to actually achieve this goal?
How much of the cake will you save for later?
Starting Out
Financial prudence suggests we should start saving as early in our working lives as possible, so based on this, lets look at the case of a recent graduate who has just landed their first job.
A graduate who can expect to earn £20,000 a year for their first job will, after paying tax and national insurance, be left with £15,962 to take home.
This works out at £1,330 per month of spendable cash. Setting a quarter of this money (£332.50) aside for saving, leaves £997.50 for a whole month’s expenses.
This budget needs to cover the basic costs of:
- Accommodation – £300 / £400 per month to rent a room (although anyone renting in London can expect to pay much more)
- Food – Say £200 a month to cover food bills
- Travel to work – £150 to £300 a month, depending on the type of commute and transportation
It also needs to cover all the other things that people in their twenties want to do and buy, and beyond that, there are student loan repayments, overdrafts and credit card debts that need to be managed too.
The upshot of this basic budgeting exercise is that both graduates and non-graduates trying to balance starting out their careers, with their first steps living independently from their parents, will really struggle to set aside a quarter of their salary as savings.
Salary Increases
Of course, it should start to become easier once our salaries begin to increase through job recognition and promotion.
Someone earning £40,000 will be able to take home £2,464 per month (after tax and national insurance). This provides much more room for saving a quarter of salary, however the only problem is that as we get older, we tend to accumulate more costs and more expensive tastes.
Rather than sharing, we want our own flats; we want new cars, clothes, holidays, laptops and flatscreen TVs. So unless you continue to live like a student, salary increases can make little difference.
Structuring Your Life To Be Able To Save More
I really struggled to save in my early twenties. Like most graduates I had some student debt, a constant overdraft, a fair bit of credit card debt and a car loan to contend with!
As I began to increase my salary, I focused on debt repayment as I knew the cost of interest on my debts was far outweighing anything I could earn on savings.
I also put together a basic budget, so that I could keep an eye on my progress towards debt repayment and ensure I didn’t spend more than I could earn.
This put me in good stead to start my company pension and to begin building up enough savings to put a deposit down on a flat (followed by a jaunt travelling around South America).
After paying off the costs of furnishing the flat and the travelling, I have continued to focus on living a fairly frugal lifestlye, which is essentially sticking to my budget and minimising things that cost me money.
For example, I’ve still got the car that I bought when I was a graduate and will continue to drive it until it has rusted away. It used to cost me £235.00 a month to repay the loan I used to buy the car with and I was really pleased when I’d completed the repayments.
I also stopped paying for services like LoveFilm that I didn’t really need, have switched to better deals on household services like electricity and tend to keep an eye-out for voucher codes and deals available for the products I need to buy.
Keeping a low spending profile, enables my fiance and I to save over a third of our income, which we split between ISA savings and over-paying the mortgage.
Steps Towards Saving 25% Of Your Salary
Depending on your circumstances, it may not be possible to save a quarter of your income straightaway, but you can always begin by saving a much lower percentage and then work your way up to 25% or more.
Here is a summary of the key steps required to structure your life so that you can save 25% or more of your take home salary:
- Step 1 – Set yourself a realistic financial goal to work towards, with milestones along the way. For example a 25 year old could set a goal to be saving 25% by the age of thirty-two and set savings milestones for each year building up to that (25yrs – 5% savings, 27yrs – 10% savings, 29yrs – 15%, etc).
- Step 2 – Create a budget to understand your current situation and manage your progress towards your goal.
- Step 3 – Minimise your spending profile, so that you live well below your means. Here are some money saving ideas for inspiration.
- Step 4 – Focus first on debt repayment, using the extra money from your new ultra-frugal lifestyle to turbo-boost your repayments.
- Step 5 – Find ways to grow your salary and broaden the positive gap between increasing income and decreasing living costs. What can you do to achieve a pay rise, find a better job or generate some sideline income?
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Photo courtesy of Valberg Lárusson
