Truing Up Your Savings Goal

Let’s say you’ve been a good boy or girl, and you’ve gone through a sensible process of figuring out how much you should save out of your current salary. Just like the example of Ernie from Thursday's post. And, like Ernie, after your first pass you find you’re saving too little or too much. You’re cheating Future You to benefit Present You (saving too little); or you’re cheating Present You to benefit Future You (spending too little). What do you do next? Well that depends. It depends on which of the following five categories you find yourself in. I’ll list them from luckiest to unluckiest.

Wealthy. You find you’re saving more than enough to keep the Future You living the lifestyle of the Present You, and you have no desire to increase your standard of living. You would get no real pleasure out of doing so. Congratulations, either you’re wealthy, or you’re on your way to wealthy! Start working on your estate plan.

Matched. The amount you need to save to provide for the Future You is actually less than the maximum amount your employer matches in its 401(k) plan; but you could make good use of an increase in spending nonetheless. Maybe you would change your razor blades more frequently. Or start buying the frozen vegetables with the sauces built right in. Whatever. Now you’ve got a tough choice. Do you plump up Future You at the expense of Present You, just to get that employer match, 25%, 50%, whatever it is? My own opinion is that you do. It’s generally smart to go for that instant return on investment. There are so many uncertainties in life anyway, you are bound to encounter future events that cause a drop in Future You’s lifestyle. Why not just get a jump on your saving on your employer's nickel.

The Middle. The amount you’re saving toward, your savings target, is based on your current spending rather than trying to avoid dropping below your personal poverty level. (Remember the Two Multipliers?) Then you should increase (if you’re saving too little), or decrease (if you’re saving too much) your annual saving. By how much? You’ll have to do some fancy arithmetic to figure that out, since your current spending level is determined in part by how much you’re saving. But that mare’s nest is a subject for another post.

Personal Poverty Level. Your savings target is based on keeping the Future You from dropping below your personal poverty level. This describes the situation in which Ernie finds himself in the example from Thursday's post. Then you should just increase or decrease your annual saving to the amount determined on your first pass. Saving more will be hard, but at least the arithmetic is easy.

Under Your Poverty Line. Your savings target is based on keeping the Future You from dropping below your personal poverty level, but if you increase your annual savings to avoid that, then the Present You would drop below your personal poverty level. You’re screwed! It’s time to rethink your standard of living or how you define poverty.