Posted by Ryan on June 27th, 2008 in Spending and Saving

So you want to become rich? You know that in order to become wealthy you need to put aside some of your income into something that will create more money and compound over time. When you break it down, that’s really how easy it is to become a millionaire. That’s all great, but you might be asking yourself, “How much should I save from each paycheck in order to become rich?”

The standard answer is to save 10% of your income. That’s easy enough, right? If you have a 401k at work, just have your employer put 10% of your money in a mutual fund so it is deducted before taxes and you’ll be on your way to making your first million. If you’re doing this, that is great, but is 10% really enough?

The 10% rule is just a very general rule of thumb, but you might want to strive to save more. For one, the more you save, the more money you’ll have and the faster you you’ll reach your financial goals. But there’s more to it than just the speed that you create your wealth. There are some very important issues that need to be considered as you map out your financial plan.

When figuring out how much I should save, I like to work backwards in time:

1. How old will I live to be?
2. What kind of lifestyle do I want to live during retirement?
3. What unexpected costs could I incur during retirement that I should be prepared for?
4. What age do I want to retire at?
5. How much money do I want and need to get through retirement when adjusted for inflation?
6. How many years of investing do I have before I retire?
7. What are my average returns on my investments?
8. How much capital do I have invested now?
9. What can I comfortably save each month now?
10. Is this enough money to reach my goals with my current timeframe and investment returns?
11. What can I do to produce more money to enhance my contributions or returns?

This allows me to clearly identify my goals and what I need to contribute on average in order to get there.

Although your income may increase as you get older, so do your expenses, so it’s important to not think you will just play “catch up” later in life. Secondly, time is the critical element in the wealth formula, as the longer your money is invested the more times it can compound and double in value. With that in mind, it is important not to put off your savings, as it can be costing you the luxurious early retirement you dream of.

Millionaire Money Habit: While the 10% rule for savings is a good starting point, it is more of a general guideline rather than a rule of thumb. Consider what your financial goals really are and outline a clear plan on how to get there. When you break it down into a simple monthly savings plan, achieving your goal becomes virtually effortless.

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