A Wise Saving Habit: The 10% Rule
I’ll be the first to admit that I’m a little obsessive about money and the process of acquiring wealth over the course of my life. In particular, I find it fascinating to evaluate the spending, saving, and investment habits of various individuals across all walks of life. Today, I’d like to compare two consumer archetypes, the conspicuous consumer and the prodigious accumulator of wealth (PAW).
I spent a considerable period of time working in the ghettos of Atlanta while serving in a volunteer ministry for my church. It never ceased to amaze me how I would be working in a government housing project, and yet it would take both of my hands for me to count the number of Cadillac Escalades present in the parking spaces throughout the poverty-ridden housing complex. How could these people afford such expensive vehicles when they were living primarily off of welfare and dwelling in government-subsidized homes? The simple answer was that they were more concerned with the appearance of wealth when they were cruising through the streets of Atlanta than they were with improving their situation. Thus was my first true exposure to the conspicuous consumer.
The conspicuous consumer is all about the lifestyle they can enjoy today, typically with little or no concern for the longer-term effects of their spending decisions. To them, money is the most easily renewable resource and retirement is something they can worry about at a later date. The end result is that they continuously procrastinate their saving, effectively paying “rent” on their lifestyle without ever building equity in anything at all.
Let’s take a look at the other hand, the Prodigious Accumulator of Wealth (PAW). I borrow this term from the book The Millionaire Next Door, which is an excellent read for anyone looking for guidance on improving their financial situation. The PAW is all about improving their actual wealth, or net worth. They purposefully live within their means, and typically save a minimum of 10% of their gross income. This “10% rule” has been promoted not only in The Millionaire Next Door, but also in other books that set out to describe the accumulation of wealth, such as The Richest Man in Babylon. The reason this rule is promoted so widely is because
1.) It’s reachable,
2.) It’s simple, and
3.) It works.
Think about it this way: for every 10 dollars you earn, save at least one dollar for yourself before spending the rest. This practice is often referred to as “Paying yourself first”, implying that you’re paying to build equity in yourself with every paycheck. This money which you’re saving is then kept as a private reserve, which you can invest in a wide array of low-risk investment vehicles. Thus, over time you are building wealth not only through your regular deposits of 10% of your income, but also through the interest being earned on the money you’ve already made. The Richest Man in Babylon likens the process to owning an army of servants which work to make money for you, the owner.
The end result of the 10% rule is that you learn to live within your means and to save a little bit. Naturally, the process of accumulating wealth can be greatly accelerated by saving more than 10%, but as long as you keep the 10% rule as a minimum, you’re on the right track.
at a risk to sounding callous, there’s a reason why people are poor. i see it too, when i work in schools in compton and watts. the kids tell me about trips to disneyland, but their parents complain that they can’t afford to buy their kids books. priorities are all out of whack.
i agree…you should save at least 10%, if not more. the more, the better i say!
This is a great post – and something everyone should read. I think sometimes the thought isn’t on savings because it seems like an “adult” think to do. This was how it was for me, anyway, back when I was getting into debt. I always thought somewhere that saving was something I would do once I was earning more money and once I had all the things I thought I deserved first. This switch in mindset is key. And I TOTALLY would have been able to save at least 10% of my paycheck if I hadn’t first started to spend 200% of my paycheck each month…
That being said, I’ve learned my lesson, and have now dropped to the other side of the spectrum. For anyone wanting to get serious about savings in an extreme way, you can always do what I plan to do – save 50% of your income and live off the rest. (Right now that 50% is going toward debt, but not for long!!!!)
It is surprisingly easy to live on half of what you earn. I live in one of the most expensive cities, I drive a gas-guzzling truck, and I eat out. It CAN be done – it just takes time to budget (I budget loosely), plan, and make yourself do it ;)
Great article. It’s amazing that you would mention the book “The Millionaire Next Door” because a couple of weeks ago, my pastor mentioned the same book so I bought it. Maybe this is a sign to actually read it and not leave it on the bookcase!!!!! Thanks.
It’s sad but true, most people live in the “now” and don’t stop to think how their spending habits are going to affect their future.
A great post to read. Its true that at times it is important to think about the future and save but again its sad that not many people do it…not even me.
Depends on your age. 10% @ 50 won’t be much, better but not much. 10% at 25 is a different story. It really depends on where you are, what you’ve saved, etc.
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This is a Wise Saving Habit: The 10% Rule. There are many people who do not take government subsidies and try to make it on their own, but ultimately makes less than $10K a year Net to live on. That would be $1K a year even at $10K to live on which leaves $9K to live on.
I agree it’s something to work toward, but even 1% or 5% would be something, eh?
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Though I agree with you on the saving 10% aspect of this article, I must say you should dig a little deeper when you see situations of poverty then looking at the surface.
Having “LIVED” in those neighborhoods that you visited, I know WHY it’s easier to grab that nice car than to save money when you are “government assistance.” Did you know that when you are on any type of government assistance getting into debt — car payment, credit card payment, etc. — is not a negative mark on receiving government assistance. In other words, having a car payment does not take away your ability to apply for food assistance and other needs. However, the minute you open a checking or savings account and put something in it more than $300 . . . you are automatically ineligible for assistance.
Never mind that that $300 hardly gets you groceries for the month. Never mind that it probably took you 3-4 months to scrap together. Never mind that without the assistance you can not possibly continue to save that little bit of money which would eventually allow you to GET OFF the assistance once it grows big enough. Never mind any of that.
Understand that your own government is “teaching” people that being consumers is to their advantage. As soon as they become savers, investors or better themselves financially . . . they are punished. Now, if this was your life’s reality what would you think about the 10% rule?
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