The Wiser Financial Advisor Podcast

Get Real. Get Honest. Get Clear.

Boiling A Frog – How Much Should I Be Saving?

No frogs were harmed in the making of this podcast—we’re big fans of our amphibious friends! Host Josh Nelson uses the frog analogy to dive into how anyone, even those living paycheck to paycheck, can take control of their finances. From setting realistic goals to building a solid foundation for the future, Josh shares actionable steps to help listeners become financially prepared and empowered.

Transcript

Hi, everyone!
Welcome to the wiser of Financial advisors show with Josh Nelson, where we get real. We get honest if we get clear about the financial world and your money.
Is Josh Nelson a certified financial planner and founder and CEO of Keystone Financial Services.
We love feedback and we’d love it if you would pass it on to me directly at josh@keystonefinancial.com. Also please stay plugged in us, get updates on episodes and help us promote the podcast, and also subscribing to us at Apple Podcasts, Spotify or your favorite podcast service.
Let the Financial fun begin.
Legend has it that if you put a frog into a pot of boiling water, that frog will just jump right back out. But if you put the frog in a pot of cold water. On a stove and then gradually turn the heat up. That frog eventually will end up boiling. And the objective will have been accomplished. If you wanted to do that.
Don’t worry I’ve never tried that myself, of course. I’m sure somebody did at some point, but the reason why we’re using this metaphor today is that the most important financial decision is what percentage of our income are we going to choose to not spend and put away for the future.
We would call that savings, investing, putting that away into the future. And the reason why this is so important is that that is the question that I get more often than not. Now, as financial planners, we like math. And we like to be able to dig into the details into the math and be able to a calculate exactly how much of your pay, how much percentage of your income needs to be going away to accomplish the things that are important to you. Your objectives, whether it be planning for not working. Planning for retirement. Maybe it’s paying for kids college. Maybe it’s paying for something else. We like math.
The other thing though is that a lot of times we just anecdotally get asked that question of what percentage of my income should I be putting away. Now, I’m not a big fan of the word should because to me it sounds a bit judgmental and not real empowering. But that’s how the question gets asked. And we don’t like rules of thumb because rules of thumb are very not exact.
They’re very kind of arbitrary and oftentimes can lead people in maybe to way over save or way under save.
So the reason why I bring this up today is that there is some value I think in getting the starting point and knowing what percentage you should be putting away.
So #1. Is that it highly depends on how much time you’ve got. If you look at all the calculations and start playing with the time value of money equation, the thing that will by far make the biggest difference is if you start messing with the time component of that.
So if you are say 23 and just out of college and just starting out in your first job someplace, it’s going to make a big difference. Say if you’re playing a retiring at 60 or 65, you’ve got a lot of time for the wealth to build up. Iif you are 55 right now and trying to play catch up, you don’t have as much time and so you may need to be putting away a lot much larger percentage of your income.
Now the old percentage, they got thrown around out there and this is not just by financial planners, but in the media and so forth as people used to see 10 to 12% was the percentage that people should be putting away.
Again, I don’t like the word should, but today we’re going to be playing with some of these rules of thumb and percentages. This is just from my observations as a planner. I’ve been doing this 21 plus years at this point, so I have a fairly good idea of really what people should be putting away if they’re trying to get that starting point before they start really digging into the weeds. And getting into the math of exact dollars or percentages, they need to be putting away.
So 10 to 12%. I would suggest that that might be a good starting point, but also remember that that was an old percentage that was thrown around that’s been thrown around for decades and there’s been a lot that’s changed since. One of those things is that company pensions, by and large pensions have disappeared.
It’s very rare that people would actually have a company pension that they can rely on when they retire, unless you work for the federal government, there are a few different employers beyond the federal government that you might get a pension, but it’s very, very rare. So you’re not getting as much money from other sources, meaning that you’ve got to rely much more on yourself.
The other thing is that especially for younger people I find are much more skeptical about Social Security and are expecting that they’re not going to see any of it.
So when it comes to Social Security, it’s important to think about. Number one, the fact that relying on something that you can control relying on yourself, I think is a good thing. #2, recognizing that those government programs can and will be changed over time,so it may not be the best thing for you to rely.
I think it’s a healthy thing for you as an individual to be thinking in terms of today. I have to save up the money to be able to retire, to be able to pay for my kids college, to be able to accomplish whatever goal it is that I am trying to achieve.
When it comes to percentage of income, I would suggest that starting out that percentage should be much higher. I think somewhere in the 15 to 20% range would be a good start. Maybe even higher. It depends on what kind of a lifestyle you’ve got or when you want to retire again. Where we need to dial in on these numbers. But I think that those percentages, those old 10 to 12% numbers are antiquated. I think 15 to 20% is a much better starting point.
The other thing too is to recognize that there’s a big question that comes up in this if you have an employer and a question is, well, do I count my companies match? Or not. In other words, I’m trying to figure out that 15 to 20% do I count the company money or not? Of course, that’s up to you.
I have an opinion on this and that is that you should not count on the company money in the percentage that you’re putting away and the reason why is that there’s two pieces of this. One of those is the company matches can be cut at any time and do get cut when there are recessions. If the company is going through struggles, that’s one of the first things they’ll cut back on is, they’ll cut back on employee benefits, sometimes even pay, but I’ve seen that happen number of times over the years. I’ve seen that happen where the company match goes to 0 for years and years, so it’s better not to rely on that.
The second thing is that part of this is who we’re becoming as far as these habits, these processes that we’re putting into place for our finances and the fact that when we’re putting that money away and choosing to not spend it right now, it’s also a matter of financial character that we’re actually building that. The more we’re choosing to put away for the future, that’s a matter of financial character.
Now the other thing that comes up here then is figuring out how do I actually pull this off. How do I do? Because oftentimes, especially younger people who are not used to doing this say there’s no way I can do that. There’s no way I can part with that much of my paycheck. I feel like I’m living paycheck to paycheck right now. You’re crazy. Josh there’s no way that I can do that.
Thus the boiling frog metaphor.
The reason why it seems so daunting is that if you’re thinking you’re doing 0 right now and you’re trying to get to 20-25% of your pay, going away, for a lot of people, they say that’s just not possible. I just can’t make that big of an adjustment. And I would say yeah, that that probably is true. A lot of people couldn’t do cold turkey like that. And so they would need to actually start with something smaller. Maybe it’s 1%. Maybe it’s something very, very small and I’ve done this with a number of people over the years and I challenge them to do 1%. Do 5%. Do something really small right now, and let’s see if you miss it and after a few paychecks, we talk and they say no, I didn’t miss it. I really didn’t miss any other. Went away and I still had money. And so forth. And so they realized then, you know what I can actually do this.
I can do more in a lot of cases. That’s what ends up happening is that people start with whatever percentage they feel comfortable with, one, two, 5% and then they start bumping it up. I would suggest. That you put it on some kind of a schedule. Put it on a reminder in your phone or calendar that you go in and select A percentage starting point. Maybe it’s 5%. And that every quarter after that you increase that percentage by 1% every quarter and before you know it, you’re going to be maxed out on your 401K or stock purchase plan or whatever it is that you’ve got at work that you can put away money into. Eventually you will end up maxing that thing out, which would be fantastic.
I would suggest that you actually start smaller, maybe then you think that you could even do just to prove it to yourself and prove that principle. That you can actually get by and put that money away and that you really won’t miss it. And you can talk to countless people that have been doing this for years and years and they’ll say, yeah, you got to start early and don’t worry, you won’t even miss the money. But you’ve got to do it in a way that actually works for you.
Got to prove it to yourself first. That those percentages really won’t end up hurting you that badly, especially if you start small and then gradually move it up over time.
Now another question that comes up here is, well, what if I don’t have an employer? Well, what if my employer doesn’t have a plan? In other words, if you’re self-employed, if you’ve got a business or you got side gigs and running around doing stuff, how do you figure that out?
It’s very easy to do.
You will not have the benefit in the employer plan where it’s being taken out directly out of your paycheck, but it’s just as easy to set up a brokerage account to our savings account someplace where that money is going in. You’ll just need to set up through the bank or through the investment company and automatic transfer that happens. Most of these companies can set it up in about whatever increment you wanted to. So it could be weekly, biweekly, monthly. It could be an automatic transfer. That’s happening.
The key is to make sure that if you if you’re doing that in the bank, or you’re doing that in an investment fund someplace that its your future, and not just assuming that it’s a savings account that you can dip into.
So that’s one thing with 401Ks retirement plans at work, it seems like a lot of people think that those are more untouchable. I think that’s a great principle. Other kind of out of sight out of mind. And it’s a good way to think about that regardless of what actual access you’ve got to the money is that you consider that your do not touch money; your future money, your financial freedom, money that you really don’t touch right now.
So those are really the keys. Then as far as figuring out this boiling the frog for, you know, maybe it’s something. Maybe it’s something else, like paying off debt. Maybe it’s some personal thing, like trying to lose weight. Maybe it’s running faster. That’s one of my goals for the year is to increase my or actually decrease my running times to get my 5K time down. Further and further.
So I’ve got a plan for that and I’ve got it going incrementally because if I go out right now and try to run a 5K in 21 minutes, which is my goal for the year, is to get my time down to a 5K in 20 minutes you probably would find me at the side of the road in someplace. Laying in the gutter, right? Just kidding. But I mean, at some point it would not happen. I do not have the capacity to run a 5K in 21 minutes, right now. But am I working down to that and do I have a schedule that will get me to that. Absolutely. So it’s really important to recognize that there’s a lot more that can be accomplished over time if it’s done in little increments and you know little percentages.
It’s just increasing by 1% at a time. And then all of a sudden you’re putting away 20-30% of your pay.
So also you know the question that comes up a lot is OK, Josh.
Know I should have done this 20 years ago I should have done this when I first started working. Whenever that was. I have a lot of success stories over the years of people who were playing catch up big time. Sometimes it’s because something that they could control. Maybe they just had bad habits earlier on and they’ve kind of gotten to the point where they realize, you know what
I can’t do this anymore. I’ve got to make some big changes or financially, I’m not going to be in the place that I want to be. In some cases, it’s things that you can’t control. Maybe it was a divorce. Maybe it was, you know, some type of a financial disaster that ended up happening that was completely outside of your control and you’re playing catch up. I’ve seen that happen with people in their 50s, even 60s, that they say, you know what I know I should be at a different place right now, but you know I’m gonna do what I can do. I’ve seen enormous comebacks.
I’m actually really proud of some of these clients and people that I’ve worked with over the years that they figured out what they needed to do and for them, that percentage might have been really high. They might have had to do 30-40% of you of their income to be able to try to play catch up, and they and they do you know it. Could be one of those things that we have a big success story to share.
In the future with other people, other younger people, and it’s kind of a cautionary tale too, where they can say, you know what, I wish I would have started earlier and here’s what you need to do. I think that’s always a big benefit. And you know in Wiser Financial Advisor that’s kind of the whole point here too. Is that King of Solomon, who they say you know, was one of the wisest, or was the wisest person who’s ever walked the face of the planet. He said getting wisdom is the wisest thing that you can do. And so that’s where what we’re after here.
And remember, there are two ways of learning. One of those is by trial and error, and certainly there’ll always be parts of our life where we’re doing that. Trying stuff. At some point you got to just try stuff and you figure it out.
But the second thing is that we can really accelerate our success by looking back and trying to learn from other people who have been successful, who have already done the trial and error. And it really can impart that upon ourselves. We can take those principles, take the wisdom that that they’re able to pass on and really accelerate our success over time.
Certainly that’s what we’re trying to do here is not trial and error. We’re trying to learn from others and learn from these financial principles that are, frankly, thousands of years. Almost all of this stuff that we talk about here, these are long, long principles. We’re not talking about market timing, things like that. We’re talking about basic wealth building.
I certainly would love to hear from you. Any feedback that you’ve got or any questions that you’ve got, you’re always welcome to e-mail me at josh@keystonefinancial.com certainly help promote the podcast. We are having a lot of fun at this and it’s going to be an opportunity for you to not only help yourself, but also help your friends, Co workers, family, anybody that you’ve got out there that needs to hear this. Make sure that you pass it on.
Of course it helps if you subscribe using your favorite service, whether it be Spotify, Apple, Google.
And of course, certainly let us know if there’s any topics that you’d like us to.
We’re also going to have a number of guest speakers this year as well, again because the important part about this is learning from others, learning from others that we know and learning from others that we don’t know that maybe like Solomon dead for thousands of years, we can still learn from these people and really apply those principles to today.
So with that, I hope you have a wonderful week and God bless.
The opinions voiced in the Wiser Financial Advisor show with host Josh Nelson, or for general information only, and are not intended to provide specific advice or recommendations for any individual to determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor prior to.
Investment advisory services offer to Keystone Financial Services an SEC registered investment advisor.