In my book I talk about how our family rule is to save 50% of our after-tax earnings. You may be thinking “How is that possible?”. Let me walk you through how you can work toward this target and also review a strategy to build what I call my Opportunity Fund in chapter 3 of my book. To do so, you’re going to implement what I call a “Savings Tax”.

For this example, we are going to start with a savings goal of 25% of gross income. Let’s assume you have a family of 4 and you and your partner make $300,000 per year combined. Assume that $75,000 or 25% goes towards taxes. This means that you net $225,000. You set a savings target of $75,000 annually, which means you still get to spend $150,000 per year. What is one path to get there? If you own a home and participate in your company’s 401k, you already have 2 significant streams of savings (numbers are approximate). For this, assume that you AND your spouse participate in your companies’ 401k programs and you own a $300,000 home with a 4%, 30 year mortgage:

• Mortgage: $6000 towards principal per year

• 401k ($19,500 annual limit per person with company match @ 4%): $51,000*

So you are already $57,000 on your way to $75,000. The next step is to impose what I like to call a “Savings Tax”. You set up a separate account with an automatic withdrawal each month. Ramit Sethi does a good job illustrating how to do this in his 12 minute video. If your goal is to save another $18,000 per year this means you need to set this up to transfer $1500 each month and move it into an account that you don’t get to see, touch or spend until you are ready to invest this money. Ideally this should be mandatory! Just like taxes, your mortgage and your 401k, it should be set up to be an automatic process that happens BEFORE you get to spend it. Now you get to spend what’s left in your account.

How did my family set up our Savings Tax? Like I discuss in my book, we use a specially structured life insurance contract that maximizes cash value. We started these plans more than a decade ago and have consistently increased the amount we save each month over this period. When we got windfalls from bonuses or investments we increased our contributions. Then we used this money to invest in cash flow real estate, finance our car purchases and save for college. One of the reasons I like this strategy so much is that once these are set up I automatically contribute each month. Just like my mortgage payment I don’t think about it anymore. It’s simply my “Savings Tax”. Of course I still have access to these funds when needed, which makes this strategy even better than having equity in my home or stuck in a 401k. Unlike taxes to the government, this money goes into MY account and I get to use it when I choose.

If you’d like to learn more about this strategy and get a free copy of my book, check out my website. In my next article I’m going to discuss “Emergency Funds”, what they are and why you need one. Stay tuned for that!