You might be surprised that how much you save depend solely on your salary. That’s one of the findings from some studies on people’s saving habits and why some are successful at it and others, well, not so much. We’ll talk about that on this MoneyWise.
“If I just made a little more money, I could probably save more too?” Have you ever thought that? You might be surprised to learn that how much you save doesn’t have much to do with your salary. That’s one of the key findings from some recent studies on people’s saving habits and why some folks are successful at it and others, well, not so much. We’ll talk about that on this MoneyWise.
Studies by the Employee Benefit Research Institute and J.P. Morgan first defined three different types or levels of savers. What they called “low savers” managed to put away about 2% to 3% of their salary. The next category, “middle savers,” banked 5% to 6% of their income. Finally, “high savers” were consistently saving about 9% of their salary. You’ll notice that middle savers put away about 3% more than low savers and high savers 3% more than middle savers.
It might seem logical but it’s still a misconception that low-income people save less on a percentage basis than those earning more money. But the research clearly showed that people, often with identical incomes, saved at different rates and not necessarily more than folks earning less. There’s no link between income and saving. This helps explain what financial author Ron Blue describes as a “consumptive lifestyle”—the more you earn, the more you spend. Instead of banking all or at least part of a raise, you tend to just increase your lifestyle and your spending.
Saving isn’t difficult, you just can’t be lazy about it. It’s easy to let your spending creep up as you earn more money. It takes discipline to prevent that. So, try this. Pledge to save any type of future increase you receive, whether it’s a raise, a tax refund or even a gift card. Use the gift card on budgeted purchases but move the equivalent amount into savings.
How do you move from being a low saver to a middle saver or middle to high saver? The research showed that you can get the most bang for your buck by concentrating on three key areas. (1) Higher savers tended to focus their saving efforts on housing. That includes a mortgage or rent, taxes, utilities and home furnishing. (2) The next saving priority was food, both eating out and groceries. (3) Finally, transportation, which includes vehicle purchases, fuel and maintenance.
What would you rather do, save $150 a month, $35 a week, or $5 a day? The researchers found that four times as many people chose to save $5 a day rather than $150 a month even though it’s the same amount (this was consistent across the various income ranges). Psychologically, it seems easier to give up something that costs $5 a day. Keep that in mind when you’re looking for ways to cut spending. It’s helpful to write down every penny you spend for at least a month, but three would be better. As you do that, look for small, repeat purchases that you can do without. You’ll discover that saving $5 a day is easy.
On this program we also answer your questions:
Regarding paying off my mortgage, should I use an ear-marked $5,000 towards the principle or just make extra payments?
I received a gift of $28,000. How should I invest this?
I want to help out my son and sell my home to my him way below market value. Will this be treated as a gift to the IRS? Will I need a real estate attorney?
What are some alternatives to the 401(k)? I’ve been hearing some negative things about them.
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