Lunatic Finance
How to Save Money Like a Lunatic
Do you want your retirement to be at the mercy of some bureaucratic social security plan and maybe a small 401k or IRA? Even if all of those hold together, most people in most countries find themselves in for a rude awakening when they realize they don’t have nearly enough gold to enjoy their golden years.
It doesn’t matter how old you are or what your income level is. Start a savings plan NOW if you don’t have one (if you do, it’s time for an upgrade). You need to put away a healthy chunk of your income EACH AND EVERY month. I’m not talking 4 or 5% of your income. You’ll need a lot more than that when you find yourself old and grey. Remember, you’d have to be crazier than me to not do this. 
The time is long overdue to find a little fat in your budget and trim it. Personally, I put more than 20% of my gross income into long-term savings and at least 10% into short-term savings. I don’t live like a monk, but I also try not to throw money away (except on charitable donations, but that’s another story).
One very important note – this is going to be a little bit like a diet. Think about this – If you decide to start a new diet and begin by starving yourself, sooner or later (most likely sooner) hunger will win and you’ll find yourself face down in a pile of snacks. If you go on a “fiscal diet” to the point where you feel “fiscally starved”, your chance of complete failure goes way up. You are much more likely to succeed if you start small and work your way up slowly and steadily.
Save Money Like a Lunatic!
Here’s the plan. When your next pay arrives, the FIRST thing you should do (after setting aside anything you plan to donate to good causes) is to move exactly 10% of the money to a SEPARATE location (bank account, safe deposit box, under your mattress) immediately. Do NOT leave it physically or electronically mingled with your other cash. Murphy is aware of your plan and he has many laws available to screw it up for you if you give him the slightest chance. Don’t wait until later. Do it on the same day you get the money.
Again, DO NOT pool your savings with your other money. If your savings are in the same account (or envelope) as your spending money, it’s far too easy to spend it or to miscalculate how much is supposed to be savings. This is your long-term savings and you will need it later. Unless you are about to starve, get foreclosed on, or need to pay for life-saving medical care, DO NOT SPEND IT.
Try to live reasonably well on the other 90%, but this is also a good time to look for things you really don’t want/need that you waste money on (admit it, we ALL waste a lot of money on things that just aren’t worth what we pay for them). I have an idea for you that I assure you is painful. but very informative. My lovely wife kept asking where all my money went. One time I decided to write it all down – each and every expenditure as it happened. My oh my was it sad to see a detailed account of all that money flying out of my pocket. 
The only bright note of this experiment was that I could blame most of the previously unaccounted for expenses on my wife and daughter. Percentage-wise, my occasional forays down the imported foods aisle (Hello Doritos! 
) weren’t that much.
Still, there are bound to be at least a couple of items here and there which you can either live without or live with just a tiny bit little less of. Again, start small. One less cup of insanely priced fruit juice at the mall per month won’t kill you. Cutting out all of life’s little luxuries may damage your will to live. 
See how much cash you’ve got left at the end of the month (I’m going to mostly use months here since China tends to operate on monthly pay instead of getting paid every two weeks – I’m sure those of you on biweekly plans can compensate). Take the remainder – the surviving cash from our initial low-pain (I hope) trimming back and see what you have. Set aside 25% to save up for annual expenses (back in the USA, property taxes, the satellite dish bill, a kitten juggling license fee, etc. would qualify). Saving up for those annual expenses now will smooth out your life considerably if some other unexpected expense pops up just when your annual membership fee for the Let’s Hunt Rhinos With Our Bare Hands club comes due (I hate it when that happens). Put another 25% of what’s left into long-term savings, and put 25% into short-term savings. Now take that last 25% and save or spend it however you like – as a reward to yourself for having anything left.
So, now you’ve got 4 piles of money. Long-term savings, short-term savings, annual expenses, and reward yourself. Good. You’ve truly started down the path to fiscal Lunacy.
If your needs are more complex, you can subdivide the piles or start up a “quarterly expenses” pile (or envelope). For example, if you want a car, that’s either from short-term savings or else start a “car fund” envelope to collect money in. As an extreme example, I know one guy who isn’t any good at all with money management. If it’s all in one place, all he sees is that he’s got plenty of money to buy things that he wants right now. To solve this, his GF grabs all of his money each time he gets paid and promptly divides it up into 12 or more envelopes to make sure that he usually has enough for various expenses as they occur.
Let’s say that that final amount you added into long-term savings at the end of the month was 4% of your monthly income. In theory, you should go to 14% when you get paid for the next month. If you feel brave, you can go for it. The drawback is that months can and will vary. It’s probably better to stick to adding only half of the 4% to your original 10% for a total of 12% to be taken out when the next month’s pay arrives. This gives you some buffer and lets your budget adjust more gradually to the changes.
What should your final % for long-term savings be? It’s hard to say, but work to increase it slowly and steadily. You need to balance the needs of your present existence and your potential future.
A couple of tricks to help increase your savings without feeling the pain.
1. If you are paid every 2 weeks, that means you get 26 paychecks per year, but you only have 12 monthly payments of monthly bills. Two months out of the year, you’ll get 3 checks. Some expenses happen every day, so won’t be affected by this. A lot of expenses (rent, mortgage, utilities) are paid monthly. For those two checks, take out what you normally would for annual, long-term savings, and short-term savings and put it safely with your other savings. Then separate out what you normally would need for monthly expenses – this unneeded monthly expense cash is your “extra money” from those two checks. Divide that extra money up between your different savings groups and also make certain to put some in the reward yourself envelope – after all, you did drag yourself out of bed every morning and show up to work to earn it.
2. If you get a raise (or a new job with more income), make VERY sure to reward yourself, but don’t go overboard. So very many people gain 20% in their income, but then instantly add 20% (or more!) to their expenses. 
If your income (after taxes) rises 20%, grab half of that for savings and then enjoy the other half however you see fit. Your immediate lifestyle will improve, but you are also are saving more money that you will need later.
That’s probably enough torment for now. When I get a chance, I’ll add more. The next part I have planned in Lunatic Finance is called Be Your Own Loanshark.
I published an earlier version of this at RaoulsChinaSaloon.com
If you aren’t ready to try to save 10%, go ahead and try the One Percent Challenge at AffordAnything.com by the lovely and talented Paula Pant. You can start with as little as 1% and escalate 1% per month from there.
