Why it's a bad idea to line your budget up with your income.
“How much of my income should I be saving?”
You’ve probably asked yourself that. You may have then thought, “Well, Monica’s father on Friends said 10% once. That feels right.”
So you save 10% of
all most of your paycheques and are confused when you die poor.
“Damn, should have gotten a second opinion!”
And that’s how you learned not to take your financial advice from 90s TV.
At least you knew not to get your fashion advice there.
It’s the wrong question anyway
Google around, and you’ll find no consistent advice on the percentage of your income that you should save.
Which is fine with me, because it’s a misguided question.
It’s misguided because you shouldn’t relate income to spending over the same time period. The times you will earn money won’t line up with the times you will spend money, so using one to inform the other makes little sense.
Here’s a crude visualization:
Times you earn money |.........--......-----------..-----......--------..........| Birth Death Times you spend money |.........--------------------------------------------------| Birth Death
Worse: you have no idea when those no-earning dots are gonna occur, or how much you’re going to need to get to the next dash.
Spending never sleeps
Spending money happens all the time. For the rest of your life. Housing costs tick away every second you’re asleep. Food’s gotta be shoved in your face every day. Heat? I like being warm most, if not all, of the time.
Earning money, on the other hand, won’t happen all the time.
You will lose jobs.
You will want time off.
You will want to retire.
You will get sick.
The 50% rule
But okay, say you need a savings rule anyway. (The leap away from monthly-money-thinking is a whole other topic.)
Here’s an easy rule that I like: spend ~50% of your take-home.
I like it because for every day you work, you know that you earn a day for yourself. That’s motivating. Work a week, get a week. Work a year … I get a whole year off??
Two-weeks vacation can eat my butt.
I’ve hit the 50% savings mark at various times, and did so while only making slightly over the average Canadian salary of around ~$50,000. I did live in a tiny, tiny, tiny apartment for a while, but it gave me the freedom I wanted. The freedom, for example, to not have to earn anything while I started a business.
(I say I hit the savings mark, but what I really mean is that I was paying off debt at first. Before I could save, I had to pay for all those days I already took for myself in University.)
One life. One income.
So here’s what we all should be doing: living on the same amount, forever.
Decide what a reasonable “retirement salary” would be for you. Then live on that for your entire life. Roughly, at least.
Don’t count on owning your house when you retire or changing your lifestyle because you’ll be old and boring. You’re gonna be old, not boring. If anything, you’ll be more exciting, more chill and love to throw parties for all the friends you’ve accumulated over the years.
I’ll go back to the average Canadian salary of ~$50,000 here as a starting point for your perpetual lifetime salary. That’s about $3,000 per month in Quebec. Living on the average makes sense because, on average, most people will end their careers earning an above-average salary.
In that case, you’d start your career off spending everything you made, then increase your savings with each raise and when you hit ~$100,000*, you’d be at the 50% savings line. Nice.
(*Numbers simplified for easy math.)
Of course, you probably won’t do that. You’ll get bigger and better things as you get older. You’ll get sick of IKEA. Then you’ll have kids. They cost a lot. You’ll live on mortgages and credit cards and car leases like a ton of Canadians do.
That’s okay too. We’re only ants on rocks in space and we’ll all be dead in a geological blink.
Bonus: here’s a great calculator for converting gross income into net income and getting your tax rates.