10%. Just ten per cent. A few years back, I read about this idea in the personal finance classic (this is a public pdf link) The Richest Man in Babylon.
The index of the original edition of The Richest Man in Babylon
Since its first publication in 1926, it is still in print. I won’t be surprised if this book survives 100 years more thanks to Lindy Effect. And why wouldn’t it? Some ideas are like laws of physics. Universal and timeless.
The idea is simple
Keeping aside 10% of everything you earn every month. Doing it every month, every year–until you meet an emergency. And still doing it after an emergency has ended. That’s it. So, if you’re a knowledge worker with a salary of Rs. 40,000 per month, you’d save 10% of it = 4,000 every month.
Just 10%? Really?
Yes, just 10%. But if your lifestyle allows you to save more, by all means, increase it to 20, 30, or 40%. But 10% is a magic number. The 10% is your daily 5 push-ups. You don’t hit 50 push-ups straight. Saving is a habit. In modern times, when every life aspect demands us to spend money, many of us need to build a habit.
The 10% saving has a feedback loop
No habit can be sustained without a feedback loop. After 2-3 months of saving 10%, we’d see our savings increase. There is no stronger feedback loop than seeing the balance increase. It is like nurturing a puppy. You can’t help but care for it.
Can’t visualize? Play with numbers
I get it. 10% feels such a small amount, that it may seem futile. That’s why I use solid numbers. Look at the calculation below.
With Rs. 40,000 a month salary, we need to put Rs. 4000 in saving corpus. If we continue doing it, what would our numbers look like over 5 years? Take a look at the corpus alone: Year-1: Rs. 48,000 (1 month of salary) Year-2: Rs. 96,000 (2.5 months of salary) Year-3: Rs. 1,44,000 (3.5 months of salary) Year-4: Rs. 1,92,000 (5 months of salary) Year-5: Rs. 2,40,000 (6 months of salary) That’s a total of 1.5 years of salary. Assuming the salary stays at Rs. 40,000. (But we know, it always increases. So, the real amount would be double than what we see here.)
These are just indicative percentages, you can change your percentage yourself in this sheet. Play with it as you find fit.
The trick: saving first, spending later
If we pay the expenses first and THEN try to save the 10%, we would fail. We would always find an excuse to save it next month, then next month, then next month.. I know what difference it would make whether we save first or later. But it does. Magically, when we keep the 10% aside FIRST, no matter how many expenses we have, we can still make do with the remaining 90%. So, the trick is to transfer the 10% into a separate savings account BEFORE we use the balance to pay for expenses such as rent, EMI, electricity bills etc.
The real impact of 10% savings
Forget money for a minute.
Saving lets you walk tall, pursue your chosen career, be honest, stand your ground and enjoy your life. This is what one of my senior colleagues shared with me a few years ago and I can’t overstate the importance of the words in this prose:
Don’t forget to tinker with the numbers in this sheet.
What is your savings mechanism? Do you follow any thumb rules? Hit Reply and share them with me.
Reads of the week:
Link Morgan is my all-time favourite author. In this article, he outlines a few skills that we rarely hear about: such as accepting a certain level of hassle in life or being able to talk to a stranger looking in the eye, etc. These skills may not seem like much but if you’ve been employed long, you’ll know what a huge difference they make.