When we look at how much we should be saving, the best conservative estimates for young professionals entering the workforce is 10% of their income. As you get older and fall further behind the investment benchmark, that amount increases dramatically. For many, even the prospect of saving 10% seems daunting. But if we set that as a level to reach, what is the best way to get there?
There are numerous strategies on how to reach those savings targets. One of those strategies is spending future earnings on our future. What does this mean? Each year, many of us receive a cost of living adjustment as part of our employment. Recently, this has been close to inflation of 2%. If you take half of this increase every year and add it to your investments, you will be increasing the amount of savings by 1% per year. Adding that on top of the amount you already save, you will be hitting the 10% benchmark in just a couple of years. And continuing this good habit? Well, that could lead you to financial freedom.
Automating your finances is the best way to achieve a positive Return on Investment, eventually reaching financial freedom through your disciplined savings. By spending the Cost of Living Adjustment (COLA) before you receive it, you trick your mind into saving. This is because when you spend money before you look at it in your bank account, you don’t feel the acute loss of those funds.
To highlight this point, try answer exactly how much you pay on income taxes each pay? Or employment expenses such as Employment Insurance (EI). Can you do it? The majority of us don’t know exactly how much the government takes per pay. We survive by spending what’s left.
By allocating your COLA in this way, you’ll never feel the loss of the funds, but you’ll certainly reap the benefits of investing now, in the future.