The 1% Rule – Net Worth: $78.5K (CoffeeForTheBuzz)

The 1% Rule – Net Worth: $78.5K

I don’t know where I first heard this rule, but it is one that has stuck with me over the past couple of years. The 1% rule is a strategy for forced savings, that I have found to be more effective than any other strategy I’ve tried to employ in the past.

The 1% rule means that for every paycheck you receive, you should save 1% more than you did last time “until it hurts”.

I think I love this rule so much because of its simplicity and effectiveness. It aligns with my belief that you should always save first and spend what’s left over (Warren Buffett anyone?) rather than the other way around, and it allows you to build solid financial habits that will be easy to keep for the rest of your life. Additionally, this is an easy rule to stick to because you don’t have to start off saving 50%, 40%, or even 30% of your income. Saving too aggressively right off the bat can cause too much unwanted stress and actually have the opposite intended effect if you decide that saving is just too much of a hassle.

But if you start by saving 20% of your next paycheck and then increase your savings by 1% of your paycheck each paycheck, I guarantee you will get to a point where you are saving more per pay period than you ever imagined possible.

Assuming you get paid twice a month, let’s look at how this could add up for someone who gets paid $4,000 a month ($2,000 per paycheck) post-tax (roughly a $60,000 – $65,000 salary).

Paycheck 1: $400 (20% of your paycheck)

Paycheck 2: $420 (21% of your paycheck)

Paycheck 3: $440 (22% of your paycheck)

Paycheck 12: $620 (31% of your paycheck)

Paycheck 24: $860 (43% of your paycheck)

Saving an additional $20 each paycheck is not that hard. You will come to a breaking point, but along the way you will also learn that there are unnecessary expenses you’ve kept in your life that can easily be removed to allow you to keep bumping your savings by a percentage point each pay period. Challenge yourself to implement the 1% rule for an entire year – this would get you to saving 43% of your paycheck by the final pay period which would come out to $860 saved on your final check for the year.

Adding up all of your savings along the way would total $15,120 in savings for the year. Not too shabby. If you save like that for your entire second year, you’ll be able to save $20,640. And once you’ve learned what level of money you can live on comfortably (i.e. the difference between your current salary and your upper limit savings after implementing the 1% rule to your breaking point), you will be able to boost savings each time you get a raise or a bonus at work. This will help you stay disciplined and ensure you avoid succumbing to lifestyle inflation – the idea that you spend more money because you’re earning more rather than saving more money which is what you should do if you’re serious about achieving financial freedom at a young age.

What % of your paycheck do you currently save? Are you willing/able to save more than you currently do now? What do you think about the 1% rule? Will you give it a try? Leave your thoughts below!

Posted by CoffeeForTheBuzz