How to save 50% of your take home income?

I save over 50% of my monthly net income.
Yes to be read it right, I save more than half of my take home income. You might be thinking I’ve gone mad: how is it possible? Do you live a stingy life? Are you a hermit?
Well none of the above.
Yes it can be difficult sometimes.
Yes the temptation to spend can be strong.
Yes it does involve making trade-offs and…
No, Mrs WB40 and I don’t eat ramen all day. We still have a wonderful lifestyle (in our opinion anyway).

Why do I do it?

Saving has been ingrained in my head ever since I was a kid. My parents are extremely frugal and have great savings and investing habits as documented by their now-famous piggy bank.
People have multiple reasons for savings and I will list mine:
  • It’s OK if I lose my job tomorrow – we already have 6+ months of living and investing expenses tucked away (and unemployment / sickness insurance)
  • It’s OK if my boiler breaks down tomorrow – I bloody hope it doesn’t! Well even if it does then we can get it fixed without going into debt.
  • It’s OK if I want to have a beach holiday in Brazil tomorrow – we can just book the flights and go, not that we would ever book a last minute flight as they are extortionate.
  • It’s OK if the market crashes tomorrow – I love investing. I love investing in a bear market even more. This means that if the crash does come, my savings gives me the psychological support of not panicking selling but instead to use the dry powder and buy more shares.

How do I do it?

Saving = income – expenditure
To generate more saving, the simple trick is to maximise income and minimise expenditure.
So here’s are the tricks.

1. Generate more income

My theory is simple: you can cut your expenditure by 100% and no more but you can increase your income infinitely. Consequently I devote 80% of my time to generate additional income.
I receive a decent salary from my employment. Additionally through side hustling I also get rental, dividend and consulting income. Currently my salary still occupies more than 50% of my total income but the aim is to get it down below 20% over time (and not through pay cuts!). That is a core part of the WealthyBy40 Challenge.
The unintended benefit of having multiple income streams is that I have diversified my income risk by not relying solely on my employer, thus I am much more relaxed and free at work, which I believe helps to boost my performance.

2. Cut the crap

Netflix? No.
Spotify? No.
Cable tv? I don’t even have a tv!
Coffee? I’m allergic to caffeine.
Smoking? Filthy habit.
I hope you are seeing a trend here. By not pursuing what I call “Latte Factor” expenditures, I immediately cut my outgoings significantly. The 5 items outlined above add up to around £250-300 per month, which is approaching 10% of my salary. They could go straight into my retirement account and I will get another 25% tax rebate from the government. Thank you taxman!
The indirect benefit of removing these habits is that I have more time, which could be used productively. Did you know that by selling my Tv, I am in line to make an additional £10,000?
This doesn’t mean I don’t have fun though. There are plenty of free entertainment substitutes:
  • Netflix Amazon Prime Instant Video, free if you pay £79 per year to be a Prime member, best purchase you will make as you get same/next day shipping on your shoppings as well as free films and music.
  • Spotify Amazon Prime Music + YouTube. Unless you are a professional musician, nobody needs access to 20 million songs at their fingertips when they have YouTube.
  • Cable TV – Who needs a TV these days? Read a book.
  • Coffee – take some caffeine tablets if you really need a plunge. Otherwise go for a run or cycle. They elicits the same physiological response
  • Smoking – you are literally paying to get yourself killed. Cease and desist immediately.

3. Expenditure interrogation

One thing I have started doing in 2018 is to spend 20 minute every month to review every single line on the credit card statement and decide if an expenditure is necessary or not. This is a retrospective technique I learnt from work where we would perform post-mortem analysis after a project / event / product launch to see where we could improve on.
I like the concept as it’s supposed to make you feel guilty about an unnecessary expenditure during the review, thus every time you whip out your plastic card, you begin to think twice about whether to make the purchase or not. That initial level of resistance can help you to defer / avoid certain purchases, which in turn lowers your expenditure.
Does it work? Well I started doing that a month ago and identified £600 worth of discretionary spending that could have been eliminated. I will tell you the results after 3 months but so far I’m encouraged by the outcome and the change in mentality.

4. Automate saving

I use 5 tools to help me automate my savings and maximise tax benefits:
  1. Direct debit into my brokerage account followed by automated monthly investment into index funds.
  2. Direct debit into my mortgage account (yes I see my mortgage payment as a partial investment because each payment increases my equity value in a long-term appreciating asset, especially given the low interest rate I’m currently enjoying).
  3. Standing order into my high yield savings account
  4. Moneybox App to accumulate and invest my spare changes (saved over £350 last years)
  5. Maximise my workplace pension by matching employer contribution from my pretax salary.
I coincide these deductions either on or around my payday, thereby ensuring that I save first before allowing myself to spend.
The common theme behind these methods is that they are entirely automated. As long as I have funds in my account then I don’t need to do anything, thus instead of forming a habit, I have put in processes and systems in place to develop a habit for me.

Wrap up

I’m not saying that you should save at least 50% of your income. I could do it because I’m fortunate enough to be both a relatively high earner and a low spender. The level of saving depends entirely on individual circumstances.
However I do believe that by maximising your earning potential, cutting out certain negative discretionary spending, interrogating your expenditure carefully and using technology to automate the process, you too can start building up a nest egg.
What’s the ideal saving level for you? Please comment away.