To ask someone to suddenly reduce their spending by 10% would be a hard task, especially as most people’s income is already fully committed to debt repayments, school fees and basic necessities, such as groceries and utilities.
The best way to start saving is to commit to saving additional future income. The “Save More Tomorrow” plan described in the book Nudge recommends you set a five-year goal that increases your savings each year using a small percentage of your salary increase until you are saving 10% of your salary.
The authors Richard Thaler and Cass Sustein introduced this scheme in Australia and, after four years, 78% of people remained committed to the plan. The average investor had increased their level of savings from 3.5% to 13.6% within those four years.
How to do it: If you received a 7% salary increase this year, sign a debit order immediately to put 2% of your additional income into a savings account. Every year, commit to increasing that debit order by a further 2% of your salary. Within five years you will be saving 10% of your salary without having to cut back on your spending. Another way to achieve this would be to commit to saving an amount that increases by a few percent ahead of inflation each year, for example a 9%-10% escalation on your monthly savings plan. |
