In the past couple of years I have continuously worked in a full time job, earning full 40 hours every week. I even got a few promotions and unexpected bonuses along the way. Our savings account, however, has mostly been quite low (less than 1 month of combined income). It always seemed like the money came in and immediately left us.
When the COVID-19 hit, my partner was not able to keep her job and had to switch to freelance, part time earnings, that were inconsistent, and lower than her initial salary. Combine that with constant lockdowns and closures of retail and catering businesses, we had to tap into the savings just to stay afloat. But wait, we barely had that, right?
Reflecting back
The past year has not been the easiest for us, and while we are still alive and well, it made me think about more fundamental values when it came to budgeting and saving. Why did we not save when we had the chance? Why did we rely on a single income stream? Why haven’t we diversified? Well, the answer for me lies in our perception of the future. We are terrible at giving up the pleasures of now, with a higher goal of being better off in the future. And we have definitely not planned for the things to go wrong (they always do). All of this might seem logical to many who have been through a similar experience, but remember, we are just starting out our lives.
So, 3 things went wrong:
- We did not have enough savings;
- We did not plan for the rainy day (even less a year);
- We relied on a single income stream per person.
Have we thought of at least one of those before, we would find ourselves in a better position to weather this storm.
While I will tackle each of those points in future posts, I’d like to focus on the savings for today. How much should we save? Is there even a number? Should we save as much as possible? Should we save enough to pay for expenses? What about emergency fund, or planned vacations? A lot of thoughts are going through my head, and I realise that there is no simple answer to this. Everyone’s situation is different, as well as incomes, so I think best is to focus on percentages of income, rather than a certain number.
How much should we save?
A few weeks back I stumbled across this video on YouTube. While the title is in line with all of the similar motivational videos, there was an important piece of information that got me thinking. It is said that you should aim to earn enough to save 40% of your gross income. Looking back at our lives in the past few years we were barely cracking 10% savings, let alone 40%. The logic is that “if you give the tax office 40%, why not to pay yourself the same?”. The country where we live does not take that much from us, but that only works out to our benefit.
I quickly made a simple sheet, and realised that if we were to save 40% of our gross income, we would not have enough to live on. Does that motivate me to save more and give up certain things in my life? Definitely. But this logic also leads to thoughts of earning more, in order to balance that 40% savings rate. If we were to start a few years ago, we would already find ourselves in a better position to plan, invest, and else. This thinking also means that while you can generate extra income, you cannot spend more until you reach that 40% saving goal. It’s a great target overall.
Thinking in numbers
We live in The Netherlands, where quality of life along with salaries are quite high, but so are the expenses. We do not have kids yet, and we have little liabilities, so we need around €3000 for us to get by comfortably. Some might argue that is too much, and we can live off less if we say no to certain things, but, hey, everyone has their own circumstances, and this is the amount that works for us.
Let’s count?
| Gross salary | €6000 | €7000 | €8000 | €9000 | €10000 |
| Tax rate (30%) | €1800 | €2100 | €2400 | €2700 | €3000 |
| Savings (40%) | €2400 | €2800 | €3200 | €3600 | €4000 |
| Left to live off | €1800 | €2100 | €2400 | €2700 | €3000 |
Please note that taxes are different for everyone and I encourage you to calculate them according to your circumstances. 30% is not the tax rate we currently pay on average, and is more of an estimation.
Seems simple, right? I mean, how did it take years for us to even calculate this in numbers… But, we are where we are and I am happy we are thinking about this now.
By looking at the table above, we understand that we absolutely need at least €10000 in combined gross income per month to save 40%. Saving €4000 is no joke as well, but that is the goal. Can we save more than 40%? Absolutely, but that depends on circumstances. I think we will also want a little bump in quality of life at that point, and we will have to balance this properly.
Saving €4000 a month, will give us €48000 in a year, which is quite a substantial amount to work with, no matter where you are located. Would this help us weather the storm we had last year? Yes, it would not only help us, it would give us a peace of mind that we have a financial buffer to rely on.
How to save more?
Saving money is not as simple as “Get salary – put some money aside”. You can easily sell some unused things at home, and contribute a bit to your goal. You can buy necessities in bulk while they are on sale (Dutch are great at this). Say, you see a toothpaste on 50% discount. Why not to buy an entire box of those? You will get it anyway at some point in the future. Do you buy coffee for home? Same thing, stock up while it is on discount. Does your employer contribute to your pension fund? Why not to treat that as savings too? Our bank has a feature where they round up each amount we spend to closest euro and save the rest aside (e.g. you spend €1.56, they save €0.44 for you). This has allowed us to save another €50-100 euros every month without even noticing. Are you trading stocks? Why not invest in the ones that give you dividends?
My point here is that each country has different techniques and we are all in different stages of our lives, but it’s important to focus on what’s truly important for you. Saving can be challenging at times, but can enable you to have a better level of confidence in the future.
Some thoughts on the side
As I mentioned in earlier post, I am not writing this blog to earn money. That might be a nice thing in the future, but for now I am using it as a place to share and document my thoughts. This helps me not to keep everything in mind, but write it out and make sense of it. If you are reading this too, whether you have already achieved this savings goal, on your way, or just thinking about it, I hope it gave you some food for thoughts.
I will be keeping track of our own savings progress, and while I am hesitant to share exact numbers of our income, I will be posting the percentages we managed to save month over month.
Take care.
