Did I save half my income?
I wanted to know — have I done that? And further, how do I know if I have?
My first thought is that it’s probably a good thing that I don’t know, right off the top of my head, whether I’ve been successful, since I automate everything, and the day after payday, my bank account is much smaller. So, there’s never very much more than an emergency fund in my easy-to-access savings account.
I’m okay with this. I feel like a fat savings account is a luxury for people who are free of liabilities. And I am not, yet. I am, however, earning interest when I pay down the things that charge me interest. Interest saved is interest earned, right?
Steps to see if I save half my income:
- Set a time. For my purposes, I’ll use 2012.
- Figure out how much I made. My income is slightly variable, so thank goodness for software! After tax, in 2012, I took home $33,100.
- Figure out how much I’ve saved. In 2012, I contributed $4425 to my IRA, paid $5497 toward my student loan, and $1911 toward my car loan. I also paid off my credit card once and for all, which was $2700 at the beginning of this year. I have an emergency fund of $1000. Let’s count that, too. Why not? That adds up to $15,533.
- Do the math. According to division, I’ve saved 47% of my after-tax income in 2012.
- Pat myself on the back for a job well done.
Certainly, I can do better. The real challenge comes this year, when I add a mortgage and have whatever home-related unexpected-but-expected costs. Hopefully, with increased costs comes increased income.
Oddly, this calculation was harder than expected. I guess it would be easy if I could just look at my savings account and say, “oh, right, there’s half of my annual paycheck right there in savings,” but that is a long way from happening.
Why should we have much of anything in savings?
I have an emergency buffer, and that’s it. Why? Because every time I make a payment on a loan that is charging me interest, I am earning interest on that loan. Remember the cliche, “a penny saved is a penny earned?” It’s true. But what’s more true is that every time I make a payment on my student loan, I’m earning 4.75% interest.
So, it makes sense to throw anything over a reasonable savings cushion ($1000 minimum, 12 months expenses maximum) toward the things that are earning interest on my money.
Here’s the point of this transparency: I don’t think I make all that much money. Sure, I’m comfortable, but $33,000 isn’t a salary for anyone to envy. (Like I said before, it’s not enough to build a net worth that makes anyone want to put a hit out on me!)
But you know what? I did it.
And if I did it, then guess what?
You can too.
It feels good, really good, to save nearly half of my income.
In 2013, I’ll save 50%. I mean it!