Imagine if you were told that from next month you would have 10% less money to spend. Yet this is exactly what would happen if you decided to start saving 10% of your income today.
While we all want to save, and 10% sounds like a good number, we know that it requires a financial sacrifice. So Nobel-winning economist Richard Thaler created a concept called “Save More Tomorrow” where you save just a small percentage of your annual salary increase each year and within six years you are saving 10% of your salary.
In this example you receive a 7% annual salary increase, but you save 2% of that – effectively giving you only a 5% increase.
To see how this works in practice, assume you are earning R20 000 per month and receive a 7% increase to R21 400.
Rather than living off this full R21 400, you open an investment and start to save 2% of the new salary, ie R428. This still leaves you with a salary increase of nearly R1 000.
In year two your salary increases to R22 890. You calculate 2% of your new salary (R458) and you add that to your monthly savings. So now you are saving R858 per month.
In year three your salary increases to R24 492 and again you save an additional 2% of your new salary: R490. You are now saving R1 376.
In year four your salary increases to R26 206 and you add R524 to your savings, increasing it to R1 900.
In year five your salary increases to R28 040 so you add another R560 to your investment, bringing it to R2 460.
By year six your salary has increased to R30 000. You add 2% (R600) to your investment and are now saving R3 060 – which is 10% of your salary.
You can also use this method to boost your company retirement fund by asking your HR department to increase the percentage of salary you contribute each year.
Make savings painless.