How to Save Half of Your Income

Saving half your income is challenging, but doing so could help you live debt-free. Putting that much money away every year forces you to make hard decisions about how much to spend on vacations, housing, automobiles and just about everything else. For people who start early, saving half their annual income could lead to an early retirement. That's possible because they will save a year's salary every two years they follow the plan, meaning someone starting at age 22 could put away 15 years of salary by age 52. With compounding interest on the money and future income from retirement plans, the investor could be set financially for life.

Instructions

1

Make a list of your current income and expenses. Determining how much to save is the easy part; deciding what expenses to cut is the hard part. Your goal is to save 50 percent of your net income---the amount you receive each payday after standard deductions such as income taxes and health insurance.

2

Choose a date for starting your plan. If you're single and fresh out of college with no debt, you may be able to start on your next payday. However, you may need more time if you already have significant debt such as a mortgage or a big car payment or you have an expensive lifestyle with lots of luxury vacations, fine dining and hobbies. It takes time to dial back that kind of living, and it could take months or even years before you're ready to start saving half your income if that's your current situation.

3

Slash expenses if you cannot save half your income with your current lifestyle. Your strategy for cutting expenses will depend on your current debt obligations and lifestyle. Downsize, if necessary, by selling your house and moving into an apartment. Get rid of a big car payment, if possible, by selling your car and buying a cheap used car for cash. Or pay off your car loan as quickly as possible by taking a second job --- or even two additional jobs. Even before selling the house and the car, slash discretionary spending to the lowest level possible. Get rid of cable television. Stop buying books, and magazines; use the public library instead. Use coupons from the newspaper and other sources to significantly reduce money spent on groceries and services. Keep a diary of all your spending. Analyze the notes regularly to determine what spending you can eliminate.

4

Pay off credit card debt, student loans and other obligations to create greater cash flow. Take extra jobs to pay off the debt.

5

Save money before it reaches you by enrolling in savings programs offered by your employer. Increase your contributions to the maximum allowed by your employer. Start gradually, if necessary, and regularly increase your contribution as your income increases and your expenses decrease. Stay with your strategy of ruthlessly eliminating debt and expenses until you are saving half of your income.