Establishing a Saving Plan

The most significant contributing factor to financial independence is savings. Numerous studies, including recent research by Wade Pfau, PhD. suggest that a savings rate of at least 15% is required in order to confidently maintain your standard of living into retirement. If your current saving rate is close to 0%, then cutting spending to divert 15% or more into savings will be painful. If you are still early in your career and expect future pay increases, I often recommend an alternative strategy to increase your savings rate without the painful and psychologically difficult spending cuts.

Every time you get a raise divert 50% of it to savings. The other 50% can go to short-term goals or to increase your standard of living. The same framework applies for bonuses. Put 50% away into long-term savings and use the rest for short-term goals or splurges. If you make sure 50% of “new money” always goes to savings, you will not experience a reduction in your standard of living and pretty quickly your savings rate will exceed 15%.

Below is a video clip where I discuss this concept when I was a panelist at the American Institute of Certified Public Accountants (AICPA) Retirement Symposium, held in New York City in June 2015.