Sarah Basford* says there is an extremely simple way to work out how much money you need to be saving so you can retire.
Photo: FuSuSu
If you’re a dummy when it comes to savings, join my club.
From the moment I got my first paycheque at 15, I was liberated with this newly found financial freedom.
I bought a surfboard I still to this day have never used and I raided Target’s Disney DVD range to add to my own dusty collection.
My first few paycheques never did last very long.
While I like to think I’ve come a long way since 15, my relationship with money is still a little dicey.
So, will it ever be possible for someone with my bad habits to save enough to retire?
Apparently, there’s a way to understand the concept more simply.
Let me impart that knowledge to you.
The maths equation, brought to our attention by Mr Money Mustache, is extremely simple to grasp — particularly for a money dummy like yours truly.
Even if mathematics isn’t your strong suit, the primary takeaway is that your “savings rate” (i.e. how much you’re saving) can be determined by your total income minus your living expenses.
It seems so obvious, but say you’re earning $1,000 each week and pure living expenses equate to around $400 — and that’s all you spend — your savings rate would be 60 per cent.
The bigger your savings rate, the quicker you can retire.
Thankfully, you can make a retirement calculator, like Networthify, do all the hard work for you when it comes to the hard numbers.
After plotting my numbers in and seeing the results, I am now placing a moratorium on my online shopping tendencies.
Incidentally, while it seems rational that having a bigger income equals bigger savings, this isn’t the full story.
As Mr Money Mustache explains, cutting your spending rate is much more powerful than increasing your income, as it builds your overall monthly savings and “permanently decreases the amount you’ll need every month for the rest of your life.”
Now, I just need to take these financial insights into my daily spending habits.
* Sarah Basford writes for Lifehacker, Gizmodo and Kotaku. She tweets at @sbasfordcanales.
This article first appeared at www.lifehacker.com.au.
