How Much Should I Save?

I get asked “how much money should I save?” quite often.

It’s one of those questions that people want a black and white answer to.

And it’s hard not to blame them. Personal finance is hard. We want shortcuts. We want easy answers. We want a cookie cutter approach.

But asking how much to save (whether a specific dollar amount or percentage) – is kind of like asking the following questions:

“How much income should I make?”

“How much food should I eat?”

“How many miles should I drive my car?”

“How much water should I drink?”

“How many years should I work?”

… and expecting one identical numerical response for everyone.

how much should I save

These are all questions that beget more questions in order to qualify a serious answer. For me or anyone to give you a cookie cutter answer in terms of a percentage or specific dollar recommendation would be doing you a great disservice.

So when I see other supposedly legitimate personal finance sources try to cut some cookies, it makes me want to gouge my eyes out with a spork.

Here’s a gem of one I found a while back, which they (I’ll save their reputation with anonymity) prescribe as the “50/20/30 Rule”:

“50% should be reserved for essentials (think housing and food), 30% should be allocated for lifestyle choices (things like nights out and 121 channels of cable), and at least 20% should go toward what we call “financial priorities,” which include debt payments, retirement contributions and, of course, savings.”

There are so many things wrong with this prescription, it’s challenging to list. But I’ll take a hearty stab at it:

  1. First and foremost, it presumes that you should spend up to your level of income. This could be the worst financial advice anyone could EVER give you. Michael Jackson or M.C. Hammer, anyone? The more you make, the higher your percentage of savings should be.
  2. There is no customizing towards personal goals at all. Does the person we are prescribing this solution to have a main goal of early retirement, buying a house within 2 years, paying off $50k in credit card debt? We just don’t know or care, with the cookie cutter approach.
  3. Only 20% towards “financial priorities” like debt payments, retirement, and savings? Meanwhile 30% (50% more) towards superfluous stuff like “nights out” and “121 channels of cable”? That’s a short cut to the poor house.
  4. Does a mortgage qualify as an “essential” or a “debt payment financial priority”? Not sure, but this cookie leaves a lot of room for interpretation.
  5. And what if you put your “financial priorities” 20% towards paying off student loans, leaving zero for retirement or other goals? At least you got your nights out and cable TV, I suppose.

You’d be foolish to take this advice and even more foolish to give it.

And then there’s the old adage of “you should save 10% towards retirement”.

This is probably one of the oldest bits of advice in the personal finance memesphere, and it keeps rearing its ugly head over and over.

What is the reality of 10% savings? Well, assuming you keep up with inflation and work 40 painstaking years, you’ll have effectively replaced only 4 years of income for retirement. If that’s all you’ve saved, you better hope and pray that Social Security benefits dramatically increase (highly unlikely) or that you die pretty quickly after retiring.

These dismal savings levels are mostly why you probably won’t receive an inheritance, because the average retirement savings are dismal:

  • Only 15% aged 44-54 have over $250,000 saved
  • Only 19% aged 55+ have over $250,000 saved.
  • 44% aged 44-54 have less than $10,000 in total savings.
  • 29% aged 55+ have less than $10,000 in total savings.

And it’s probably why most generations will be almost completely dependent on government assistance for life sustenance.

Sadly, 10% is more than 2X the average American personal savings rate of 4.6%. And the millennial personal savings rate is even worse. Not good…

So… how much should you save?

Here’s the most cookie cutter answer I can fairly give you:

Save every damn cent that you possibly can without reducing sustainable happiness.

Your future self will thank you. And maybe even your present self too. All work is temporary.

Update: if you’re looking for a specific retirement number, safe withdrawal rate can be your guide.

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