The Importance of Saving
You moved to Los Angeles, rented an apartment, have a reliable set of wheels to get to around and found a decent job that pays 20 bucks an hour. What else should you be doing money wise. The next thing to think about is saving part of what you earn.
What is Savings or Savings Rate?
First of all, what is savings? Savings is the difference between what you earn and what you spend. You measure the savings rate over a period like a month or year.
Suppose you earn $20 per hour and work 40 hours each week. You monthly pay before taxes would be $3466.67. Lets say your take home pay after withholding taxes is $3000 per month. Suppose further that your monthly spending comes to $2400. Your monthly savings is 3000 minus 2400 equals 600 dollars per month. Your savings rate as a percentage of your income is 600/3000 = 20%
Note: People often use the term “Savings” to refer to the total amount of money that they have in their Savings Account, as in “my life savings is $44.16″. This sum is an asset which would be part of your net worth. We use the terms “savings” and “savings rate” as the difference between what you earn and what you spend, without regard to how much dough you already have in the bank.
How Much Should I Save?
The glib answer is as much as possible. Some highly paid workers that live frugally save as much as 50% of their take home pay. I actually know people that save that much. However, unless you have a very high-paying job and live extremely modestly, it will be difficult to save 50% while living in Los Angeles.
My recommendation is to save at least 15% of your take home pay. If you can manage to save 20% even better, because you will reach your goals faster. If you are not saving anything, maybe you can start with saving 10% and increase it over time. For instance, when you get a pay raise, put most of your raise into additional savings.
Goals: What Do We Save For?
The first answer that springs to most people’s minds is a rainy day which is actually a very good answer. A rainy day would be if your car broke down and you had to pay a $1200 repair bill. A major thunderstorm would be if you got laid off from your job and lost your income for a while.
Emergency Fund. So you should save money for an emergency. How much? In the case of loosing your job, you need enough to pay all your bills from the time you are laid off until you find a new job. You should know how long it will take to find a new job in your field. If a job search takes 3 months then you need three months worth of expenses in an emergency fund. Suppose your monthly expenses are $2700 per month. Then you need $8100 in an emergency fund which you would keep in your savings account.
Car Fund. Another reason to build up your savings account is to replace your car when it wears out. Suppose you have a 2004 Toyota Corolla with 90K miles on it. Every year you will drive about 15K miles. So in about 7 years you will have about 200K in the car and it might be time to replace it which may cost $10,000. You will at least need $2000 for a down payment. If you can manage to pay the entire $10,000 cash for a new car you will save a lot of money in financing charges.
House Fund. Someday you will probably want to buy a place of your own. When you are ready to take that step, you will need a hefty down payment of 10 or 20 percent. On a 250K condo that would be 25,000 or 50,000 dollars. That is a huge amount of money.
Retirement Fund. Yes I know you are just starting out in the workforce, but you have to plan for retirement as early as possible. Many employers offer 401-k retirement plans to their employees. There are also IRA accounts you should know about. This is a complex subject so I am going to leave it out of this discussion and deal with it at another time.
Savings Goal. So what would be a goal for your Savings Account balance? $8,100 Emergency Fund + $2,000 car fund + $25,000 house fund = $35,100. Oy vey, you better start saving.
Automatic Saving: The Secret to Saving
If there is one secret to saving is this: use automatic saving. When your paycheck is still whole, before you spend any money or pay any bills, automatically take money off the top and stick it into your savings account. This the easiest way to save. When you never see it, you will never miss it.
Ask your employer if they will automatically deduct savings from your paycheck and deposit the money into a savings account.
Credit Unions. Many people have a Credit Union where they work and this is the place to save. If this is you, join your Credit Union and open a savings account, which they might call a shares account. Every payday money goes into your credit union shares account. The rest of your paycheck gets deposited into your checking account to pay your bills.
Bank Savings Account. If you don’t have a Credit Union where you work, have your employer direct deposit your paycheck into your checking account. Then you can have your bank automatically transfer funds to your linked savings account. Again, a form of automatic saving. Most banks like Wells Fargo or Bank of America already have programs to do this for you. Ask at your bank how you can save automatically.
401-k Plan. One of the benefits that many employers offer their employees is a 401-k plan. This is a retirement plan and I will discuss it in another article I will just say that if they offer you a 401-k at work, take it. It is another way of automatic saving. Your payroll department will automatically deduct your contribution from each paycheck and stick it into your 401-k. Some employers even provide matching funds which is free money. Yes, free money!
Two Ways To Increase Your Savings Rate
If you are not saving enough, what should you do? How can you increase your rate of savings?
Spend Less. Savings equals What You Earn minus What You Spend. The easiest way to increase your savings is to spend less. Some of your monthly bills like rent and cable are fixed. But many of your bills can be controlled or reduced:
- Rent– get another roomate to share the rent
Cell phone–the more minutes you use, the more it costs. Use Skype to call from home.
Food–eat out less, cook at home.
Gasoline–ride a bike or combine trips so you drive less.
Entertainment–borrow DVDs from the public library
You get the idea. With the economic crisis and recession, frugality is catching on in America.
Earn More. The second way to increase your savings rate is to earn more. Either find a higher paying job, work more hours at your current job, or get second job. If you earn more money without spending more, you will save more.
For many, working overtime or getting a second job is a tough choice, because actors already have a second job, their acting career. The day job pays the bills and their free time is spent pursing the dream. Unfortunately, dream chasing rarely pays anything. Most actors have little or no income from acting. So it is probably best to focus on spending less.
Here are some books that can teach you about saving money: