Dirt Simple

A while back, I posted 15 Dirt Simple Steps to Improving Your Finances. In Step 4, I said, “Kill off high-interest credit cards, and loans first.” The next step was to start establishing your savings, or emergency fund. Then back in another post called Keeping Track, I said to be sure and start an automatic saving plan, but to just start with an amount which your comfortable with.

Well, I’ve been doing some reading, and have reconsidered my initial dismissal of the 10 percent rule. The 10 percent rule states that you should save 10 percent of your income right off the top. I was taught that it was best to tackle high-interest debt first, but in Why Smart People Do Stupid Things with Money: Overcoming Financial Dysfuntion (amazon.com), financial planner, Bert Whitehead, advises to save the ten percent regardless, because it is more important to take that money out of your spending pool to begin with.

Ideally, put a good portion of this money in a tax-sheltered account (an IRA, or your 401(k), or an RRSP for Canadians). Since there are tax consequences to taking the money out, people tend to be less likely to touch it.

My own experience bears this out. When I was about twenty, I started my Registered Retirement Savings Plan. I had a savings bond given to me, and started the plan with that $2000. I also set up an automatic contribution of $50 per month. This was less than ten percent of my income, but I wasn’t that disciplined back then. The money was invested in a single mutual fund, which was a balanced fund (a mix of stocks and bonds) sold by my bank.

All through my twenties, I continued to pay into that RRSP. Occasionally I made a lump sum deposit when I got a gift of cash. But for the most part, I was like most people in their twenties and spent every dime I earned–except for that fifty bucks a month.

By the time I turned 29, I had accumulated roughly $15,000 in my RRSP. Far from spectacular, but better than most people I knew. Part of that success was the good fortune to have been invested all through the bull market of the late nineties. But the simple act of saving a regular amount consistently over a period of years is unquestionably effective, even if you’re not so savvy with the rest of your money. I shudder when I think about how much more money I would have today, had I only doubled my monthly contribution.

So, consider committing to saving 10 percent of your earnings. Make it automatic. Make it tax sheltered. Stick to it. Once you’ve done that, you still need to kill off those credit card debts, but your net worth will be building automatically in the background.