Tom Corley’s ninth habit, from his book, Rich Habits Poor Habits, is a building block of financial independence :
I will save 10% of my income and live off the remaining 90%
In the world of FI/RE 10% is a miniscule amount, but for many people it is a start as the majority of the population are saving little if any of their income. I am only saving 16% of my income at the moment, but I am overpaying the mortgage. If I included the mortgage overpayment as savings, I would be saving 38% of my income. Part of the problem is that I am the only one in the house paying the mortgage, overpaying the mortgage and paying all of the bills. If I was only paying half of the mortgage, no overpayment and only half the bills I would be saving about 45% of my income. This is still a lot less than those hardened savers of the FI/RE movement, but still a great deal more than most people.
How much you want to save depends on your circumstances. If you’re young and don’t want to retire early and if you’re already paying into a pension then saving 10% of your income may be okay. If you want to FI/RE in fewer than ten years then the number I often see when it comes to saving is around is 70%. That involves a drastic cut in your expenses. One of the cornerstone articles on how much and for how long you need to save can be found here written by the now legendary Mr Money Mustache.
Successful people monitor their finances
Do you have a handle on your money? If you’ve come to this site because you’re interested in FI/RE you probably have, but maybe you are interested in wellbeing and found your way here. If so, do you have a monthly, annual and/or five-year budget plan? Budgeting always sounds very boring, but it can really take the stress out of your life. It doesn’t mean that you have to cut back on everything, but you can spend in the areas that mean a lot to you in the knowledge that you’ll still be able to pay the bills and eat, come the end of the month.
Don’t know where to start, just try tracking your expenses for a few weeks to see where you spend your money – whether it’s on a spreadsheet or good old-fashioned pen and paper. It may come as a surprise when you find out where it’s all going. Then have a look at this post by Radical Fire about creating a budget.
Successful people have a retirement plan
In the UK all employers must provide a pension scheme for those employees over 22 who earn at least £10,000 per year and they will enrol you in this automatically. From April 2019 you pay a minimum of 5% of your salary and your employer pays 3%. Unless you choose to opt out the majority of people will therefore already be saving 5% of their income. How this money will increase over the course of your working life is not certain and whether you will get a state pension on top of that in the future is I think debatable. Putting aside just 5% of your salary into a stocks and shares ISA will bring your savings up to that 10% recommended by Tom Corley.
Rich Habits Poor Habits states that in contrast to rich people, poor people have bad habits. They live payday to payday, are poor savers, their credit cards are maxed out. They do not contribute to retirement plans, some gamble excessively and see the lottery as their retirement plan. They are unwilling to alter their lifestyle in order to save.
So which one of these are you? Are you the person who is going to be rich in later life as you’re planning for the future or are you living payday to payday, spending money on frivolous items such as the latest mobile phone or frittering it away on coffees and lunches everyday when you could bring your own? It may seem really boring to think about this and the future may seem a long way away, but your older self will thank your for the good financial decisions that you make today. If you want to learn more about the habits of the rich then don’t forget to have look at Tom Corley’s book.