Are the Experts Killing Our Savings Potential?

If you’ve been following my posts since the summer, you know I’m partway through a yearlong shopping ban, in an attempt to live off less of my income and save more money. The idea was sparked by a conversation with a friend who told me she saved 20% of her income each month and, therefore, felt she could spend the other 80% on whatever she wanted. The comment was one I’d heard and read dozens of times before, yet it took her saying it for me to finally have the aha! moment and ask: do you actually need 80% of your income, or could you live off less and save more?

I don’t blame her for thinking that saving 20% was enough. Heck, I’d thought the same way for an entire year, up until that point. My budgets were literally written around the fact that I would first save 20% of my income and then allocate the other 80% to everything else. Now that I’ve reworked my monthly budget and have seen how much I can actually save each month (a lot more than 20% when I don’t travel), I’ve finally realized something: we’ve been doing it backwards, all this time.

Growing up, I feel like one of the most common phrases I heard was to “save 10%”. I heard it from loved ones, from the media and even from the experts.

Dave Ramsey: Savings = 10%

If you’re in the U.S., you’ve likely heard those words come out of Dave Ramsey’s mouth. In his budget breakdown, he suggests you save 10% of your income. The leftover 33% not allocated below could be split amongst your living expenses, debt repayment and more savings goals… but you’re only told to save 10%, so it’s easy to see why some people might save no more than that, if they followed this.

LearnVest: All Financial Goals = 20%

LearnVest suggests using the 50/30/20 rule. With that, the first 50% of your income goes towards your fixed costs (for me that’s rent, utilities and insurance policies), then 30% covers variable costs (groceries, gas, shopping, etc.) and the final 20% is allocated to all your financial goals (LV says to focus on paying down credit card debt, building an emergency fund and saving for retirement). If I had only allocated 20% of my income to all my financial goals when I was maxed out, I would still be in debt. I don’t like this model, because it literally tells you to spend 80% of your money. Bad advice, friends.

Gail Vaz-Oxlade: Debt Repayment = 15%, Savings = 10%

Gail’s budget breakdown is the closest I would follow (and did for a long time, other than exceeding the debt repayment amount). She suggests spending 35% on housing, 15% on transportation (car payments, insurance and gas), 25% on living expenses (groceries, cable, internet, health/life insurance policies, etc.), then allocating 15% for debt repayment and 10% for savings. If you’re debt-free, take what you would’ve budgeted for debt repayment and allocate the full 25% for savings instead. I would probably suggest this to anyone with debt who was writing a budget for the first time… but I still think we can do better.

What the Experts Don’t Suggest But Should: Living Expenses = 50%

Notice I didn’t mention anything about savings goals? That’s because I think we’ve been doing it backwards, this whole time. What if, instead of telling us how much to save, we grew up hearing how much we should live off of instead? What if your parents had made you save half of every paycheque you earned as a teenager? What if your teacher (of the personal finance class that only exists in my dreams) had told you the goal of budgeting was to live off half of what you earned as an adult? What if the experts said the same thing in all their books, courses, shows, etc.?

Now, please don’t take the title of this post too seriously; it’s meant to be tongue in cheek, to get your attention. I don’t actually believe personal finance experts have hurt our savings potential. Without their advice, I probably wouldn’t be in the habit of saving at all! I just can’t help but wonder how different our financial situations might be if the conversation re: budget breakdowns was turned around right from the start, so we were less focused on all these random categories and just focused on one: live off half. Pete did it and he retired at 30… so what do you think the rest of us could accomplish, if we did the same?

What do you think?

*I also want to add that, since our talk this summer, my friend is now saving 30% of her income. Oh, and she’s not my friend. It’s Baby Sis. At age 20, she’s trying to max out her tax-free savings account and is obsessed with tracking her investments. My mini hero. So proud.

Flickr: Jacob Edward