There’s no shortage of “how to budget” resources in the world. And everybody knows they’re not supposed to spend more than they earn. So one could assume a low savings rate is not a problem of arithmetic deficiency – given most Canadians have the Grade 3 skill set required.
So what exactly is the problem?
For a lot of people, meticulously formulating and tracking a household budget works about as well as me on a dance floor. Believe me, it ain’t pretty. But I’m a veritable Fred Astaire with a spreadsheet.
There was a time when I would grab a receipt for every single thing I purchased and put it into my spreadsheet on a monthly basis. It was great for finding out where I was spending more than I thought, and it allowed me to save some money by consciously cutting back where I felt appropriate. Cutting back would yield cash left over at the end of the month. Great.
But for those of you who are bad on the budgeting dance floor, take solace. Here’s why I abandoned spreadsheets and never looked back: Human beings have an uncanny ability to adapt.
Up to a point, if you receive a rent increase notice from your landlord or your mortgage payment goes up on your next term, you’re not likely to move. You’re more likely to stay where you are and suck up the increase. Ditto for gas. The price of gasoline has skyrocketed yet we still have traffic jams. People adapted. Remember when gas first hit $1 per litre on the way up? People went crazy. If it hit $1 per litre today, we’d be dancing in the streets.
But if gas did in fact fall to $1 per litre, not many would suddenly start saving the savings. Many of us would simply spend the extra money elsewhere. We would adapt.
So for many people, the trick may simply be to force yourself to adapt. Instead of waiting to see if there is a surplus at the end of the month, have your desired savings taken out of your bank account automatically on the day after you get paid and just focus on not getting into the red before the next payday. You will adapt.
If you are worried you’re already stretching your income, the worst-case scenario is that after a few months you have money in your savings account and an offsetting amount of money owing on credit cards. You can take the cash from the savings and pay down the money owing.
But I would be willing to bet that most people who think they are stretched already will suddenly find they have savings without extra money owing simply because they adapted to the new normal.
Some people do fine with spreadsheets and that’s great. But for others, simple budgeting problems seem insurmountable because we might over-think them. Stop thinking, and just do. Some call it “pay yourself first,” others say “make it automatic.” I say “dance, cowboy.”
How much should you save?
1) The traditional recommended savings figure is 10 per cent of gross income, but this is for long-term savings. If you save only 10 per cent of income and end up spending the accumulated savings once a year, you will have done nothing to prepare for retirement.
2) Given that 10 per cent should be the minimum to invest for the future, you need to determine the percentage you'll need to tuck away as short-term savings for the year.
3) Short-term savings covers lump-sum expenses such as vacations, birthday and holiday presents and other non-monthly items. If you can earn interest on saving up for these expenses ahead of time, instead of paying interest to finance them after the fact, you'll be one step ahead of the game.
4) Be sure to increase your savings when your income goes up.
Preet Banerjee, B.Sc, FMA, DMS, FCSI is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee