Budgeting: Investing 5% Of Your Income vs 20% (Over 10 and 20 Years)

It's time to start (or aim towards) saving 20% of your income!

• A good budget will leave you in a better position to hit your financial goals, prevent you from overspending and, in extreme cases, protect you from spiralling into debt.
• When it comes to budgeting, discretionary items are usually optional. It’s easier to cut back on discretionary spending compared to trying to save on essential costs like food and rent. 
• But the essential thing you can budget for is to pay yourself first. Try to set aside 20%, or more, of your take-home pay (after-tax) to reduce any high-interest debt, bolster your emergency fund, invest for medium and long-term goals and achieve a happy long-term future!

In this article, we demonstrate just how big a difference it makes, in the long run, to save 20% of your after-tax income compared to 5%. In addition, we also show the power of saving half your raise.

Visualising Different Levels of Saving

If you can comfortably put away 20% towards savings, and investments and topping up your emergency fund, there’s no reason to stop! Add to it by taking at least half of any raise you get whenever you get one and add it to the original 20% that you started with. If not 20%, then whatever you can afford at this stage. Trick your brain by seeing it as something more positive, like "spending half your raise" instead! You’ll find that the benefits are substantial. 

If we assume: 

• You get a 3% raise at the start of each year.
• You put half of that raise on top of the 20% of your current year's income that's going into savings (or however much you've been able to afford). 

Over ten years, the total savings of an individual earning $36,000 (at the start of year one) would be $98,350.

Without saving half of the raises into savings over ten years, the total amount saved by an individual earning $36,000 (at the start of year one) would be $82,540.

Here’s a table to summarise it, including what would happen if those savings were invested, achieving market returns of 7% per year:

Person Budgeting at 20:50:30

Over 10 Years

Over 20 Years

So, the saving period went up by 100%, but the total savings increased by 270%. After 20 years, that's 30% more in your investment account than if you'd just stuck to saving a fixed percentage of your income! 

Versus Person Budgeting at 5:80:15

Over 10 Years

Considerably lower figures than saving at 20:50:30, obviously, but look how much of a difference it makes by saving half your raise! After 20 years, you've got $172,000 or 185% more than you would have to stick to just that initial 5% that entire period!

Over 20 Years

This hack automatically increases the total saved each year as a percentage of income, allowing you to grow your savings while still being able to enjoy most of your income. After all, you’ve worked hard for it! 

VISUALISING 5:85:10 vs 20:50:30 BUDGETING. COMPLETED. ✅ 

Sources:

1. Header photo from Burst