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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
How do you feel about Mr. Money Mustache’s ‘Simple Math to Early Retirement?’ I just discovered it recently and found it interesting. Do you think there is any merit to it?
This looks like the personal savings rate and years needed to work curve that Jacob @ Early Retirement Extreme created (or at least first made popular on a personal finance blog).
It’s five steps ahead of where most people are at, but if you’re there, it’s helpful. It assumes your immediate financial goal is early retirement. Most people aren’t there or even close to it – so it’s a non-starter for them. Then, it takes into account spend levels, personal savings rate, and the assumption that you’ll be able to effectively invest and earn money off of your savings.
Excellent post. If this post would have said “save 50%, no less” I can guarantee I initially would have been driven away. But I started saving 20% two years ago and realized I could move up to 35% if I cut buying gadgets and superfluous coffee and beer. Today I’m saving nearly 45% of my income and my happiness level has increased. I think everyone should save as much as they possibly can to start but keep climbing. That first $50k feels really good at 25 years old. I can’t wait for the $100k.
Love this post. Yes, save as MUCH as you can. This doesn’t have to mean that you are hating life and not enjoying a single thing. It means that you don’t need to find excuses to spend money that does not increase your happiness.
I’m with Michelle on saving as much as you can.
Great post! I despise the 50/20/30 rule as well (and most of the advice the not-to-be-named site offers).
The problem with the 50/30/20 rule is that the essentials can be relatively flat regardless of income. The same thing goes for the superfluous items encompassed in the 30%.
Just because you get a raise doesn’t mean you need to go buy a nicer house or get a brand new car. I think the real key is to find a level of essentials and items “for fun” that works for you and then save more and more as your income level goes up while keeping your other spending relatively stable.
Agreed. I also don’t understand why they want you to put more money towards “non-essentials” than “financial priorities.” Seems a little backwards.
Based on the article’s title, I thought this would be about how many months of living expenses one should have in completely safe assets (e.g. savings account). But I digress.
While I agree that most cookie cutter rules are insufficient, they’re better than nothing. As noted above, the average savings rate is far, far below what these one-size-fits-all approaches suggest. While it would be ideal if everybody actually saved/invested enough, that’s not going to happen. But if say, the 10% investment rule actually gains serious traction and the average savings rate doubles, that’s a huge step in the right direction and will make future problems less intense.
True. 10% > 0%
And for those who are at 0% or in the red, it’s a step in the right direction.
But it’s raising the bar from the ground to just above the ground.
And the reality is that 10% won’t get most people very far towards towards their retirement goals either. And most people could do a lot better than that for themselves.
This formula is based on Elizabeth Warren’s book All Your Worth and is called the Balanced Money formula. Far from cookie cutter, it is a general framework that anyone can use to meet any specific goal that they might have.
If you haven’t read the book, I’d highly recommend doing so before throwing the formula out with the trash ;-)
It’s a mass market formula for those who want to follow a mass market lifestyle. If you don’t want mass market results (5% savings), then I think you can do better for yourself.
I agree with you G.E. in that one should save every cent you can and you’ll thank yourself later. However, my wife does not, and will not be persuaded to, agree with me on this. She is much more cognizant of the family’s immediate happiness. We both admit the importance of the other’s viewpoint, and when she starts talking, we’ll have to figure in the little anklebiter’s opinions too. As a useful compromise, I compare our progress toward FI against the balanced money formula so we don’t have to constantly nagotiate* if we’re saving or spending too much. So AYW’s goal of finding balance is very effective for us, though we didn’t want a mass-market late-retirement plan so ours is more 60/30/10 for needs, savings, wants. Any unsalaried bonus income is 30/35/35 for taxes/savings/wants.
Even though you don’t like their formula, I think the premise of AYW really helps you figure out exactly how you can ‘save every damn cent that you possibly can without reducing sustainable happiness.’
Just curious, where did you get the dismal average retirement savings numbers you quoted?
Hello. At first, I was put off by the idea of such rigid adherence to reaching a financial goal, but you redeemed yourself in the end with, “Save every damn cent that you possibly can without reducing sustainable happiness.” I think this is the best financial advice on the planet. My good friend saved all his life to fund retirement & to buy a home out of the city, he died suddenly at 44 years of age. It’s too bad he didn’t get to enjoy a trip to Disney with his family, like he always wanted to do or move out of the city that he wasn’t enjoying. He never had a chance to really live. We have to remember life is short and it’s essential to live, love and spend time doing things that make us happy.
Balance is key in personal finances. When you overspend, you are out of balance. When you over save, you are out of balance. Over save? Yes, you can over save. Living in your car to avoid rent or mortgage payments may be over saving. Or, it may be the right thing for an individual that enjoys the lifestyle. Personal finance is, after all, personal.
A fool and his money will soon part ways. A wise man learns to be content with what he has, instead of envious of what others have. What is your life goal? That should definitely shape your financial goals.
G.E., what do you think of my post?
“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.”
You’re assuming you save 10% but aren’t investing it into anything?
Assuming investing returns keep up w/ inflation. The reality of investing returns? Nobody can predict.
While it may be true you cannot predict investment returns in any given year, the premise that retirement savings as noted above barely break even with inflation is misleading. The stock market average over the past century has beaten inflation. What happens if you now take a modest growth in the market? I understand your point that 10% is not going to be enough but it just seems odd to me to put it in that type of perspective.
I said “if”. You can’t assume everyone gets historical market returns or that future market returns will emulate past. I think the retirement crisis that we are facing in this country is partly fueled by the fact that many overestimate the ability for Mr. Compound Returns to swoop in and save the day. Save more, assume less.
I wonder if the statistics are a little skewed due to the fundamental shift from defined benefit plans to defined contribution plans. “Retirement assets” to me would mean those in an individual’s name. If someone has a pension plan, those assets would not be counted but may be a large retirement savings number.
Also, the power of compounding is the MOST important financial tool in our personal finance tool kit. Save early, save often.
As a 22 year old whos had a job for the last 4 years (military) and whos about to not have a “real” paycheck for the next three and posisble more (ha) while i finish school. Heres my simple take…
Save what you can, while you can.
Living more simply is the easiest way to save.
Do the math
Ive saved 55-70% of my monthly income for the last 2 years. I have a roth ira ive maxed out since inception. Will i be able to max out my IRA while attending school and working a minnimum wage job..Probally not. But I bet i can still put away at least 20-25% of the maximum contribution. You do what you can while you can.
A twenty-somthing dude
This is by far the best advice on how much savings I have received so far. Most of the articles I read on savings were crap to be honest.
My goal is to become financially free in the next 10 years (I am 23 now and still a college student). And for this goal I had initially decided to save and invest 70% of my total income. But I hereby declare to just go by your advice and save every damn cent I can! Hell, why not just set a ceiling to how much should you spend? I mean you know yourself. You know what is necessary for your survival and happiness. So cut that money out and save the rest. Do this the first day of your payment. And, try to save if you can from even that cut (as if you were making only that amount of money). I have learned in life, creating artificial constraint can force us to be way creative than we could imagine.
Oh and btw, I invest using value investing principles which has worked pretty well for me (12% return in 2 months), so I am pretty confident I will reach my goal sooner rather than later.
Thank you for this article! It perfectly points out all of the reasons I tell my friends to save what they can while they can.
I wonder though, where do suggest they keep that money? A rainy day savings account? A CD? An IRA?
What do you recommend for those that are starting their saving journey?
I think it will depend on your situation, but I keep my emergency fund/cash savings in a high yield savings account (Capital One 360). The remainder I invest through a combination of normal brokerage account and roth IRA account. The CD rates aren’t great right now due to the treasury rates.
Hope this helps.
its nice to have financial independence early in life BUT you have to consider inflation and the havoc it has played in retirement….Do the maths and invest intelligently …Read S&P 500 mutual funds and their performance..