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What Percentage of Income Should Be Saved to Be Financially Responsible?

This article was written by in Saving. 29 comments.


I’m pointing out a recent article featuring advice from Walter Updegrave, a senior editor of Money Magazine. Recently, he was asked to quantify the percentage of income that any individual should save in order for this particular action to be considered “financially responsible.” Normally, the advice I’ve seen suggests a rate somewhere between 10% and 20% of income, so I was expecting Updegrave’s advice to head in that direction.

Rather than providing a hard percentage, Updegrave took a more nuanced approach.

Well, as much as I’d like to be able to tell you to save 10%, 15% or whatever and you’ll be fine, it’s impossible for me to do that without knowing a whole lot more about you. The percentage of income that’s appropriate for you will depend on your income, age, the amount of money you’ve already saved, your employment prospects and, most important, how much you’re willing to forego immediate gratification for current and future financial security.

It is good to see writers admitting that personal finance advice is not one-size-fits-all rather than going for the knowledge-nugget. Knowledge-nuggets are like those chicken nuggets at that fast-food restaurant with the yellow double arch-shaped letter. They’re tasty, but not very healthy, and you get sick of them after about 25.

Every individual is surrounded by a unique situation, and that should be reflected in personal finance advice.

Tips on the other hand can be general enough to apply to a large swath of individuals. Updegrave answers the reader’s question as best as possible without knowing anything about the individual, but then leads into a few savings tips that are applicable to just about everyone: Start building an emergency fund (and here are 50 tips for building one), be serious about investing for retirement, and find additional ways to save such as automating your savings.

If nothing else, saving 10% of your income is a good start if you’re not saving anything, and saving 20% of your income is a good next step if you’re saving 10%.

3 steps to financial security: Save, save, save, Walter Updegrave, Money Magazine, April 30, 2009

Updated September 17, 2011 and originally published May 1, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 29 comments… read them below or add one }

avatar Kyle

I think 10% is a good starting point and then base on your individual requirements for saving and propensity for risk you can adjust from there.

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avatar Jimmy Day

Flexo, just out of curiosity, are we talking about gross or net income here?

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avatar Luke Landes ♦127,535 (Platinum)

Gross income is the better basis for figuring these savings targets, but I’d take net income as a basis if the other option is nothing.

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avatar Jimmy Day

Gotya. If that’s the case, it appears that I’m saving right about 20% of my gross income (I had no idea I was doing that well…thank you Dave Ramsey!).

I’m actually concentrating the majority of that 20% on my car loan which will be paid in full by Oct. 1st, and then it’ll be on to maxing out my Roth IRA and dumping the remainder in my 401K.

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avatar Matt Jabs

My wife & I are currently saving 5% of our income. We currently have our heads down in hard core debt repayment mode. Once I pay off my $12,000 or so in high interest credit card and auto loan debt, I plan to bump my savings rate up very high until I have funded my Emergency Fund with around $20,000, then I am going to hit my 2nd mortgage ($40,000) and shoot to have that paid off in 5 years or less.

Once I am in a more comfortable spot (debt down & EF built up) I plan to have at least 10% going into cash savings and 10% going into retirement savings.

Once 2nd mortgage & student loans are gone I want to save between 25% and 50% of my income…I’ll let you know when I get there!

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avatar Luke Landes ♦127,535 (Platinum)

Sounds like you have a great plan. Definitely keep us posted!

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avatar Olivia

I don’t like the idea of setting a certain percentage each month to save. My husband and I save as much as we possibly can. Some months, that is about nothing. Other months, it can be more than half of what we earned. Our income and expenses change throughout the year, so it makes more sense for us to save this way.

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avatar Acajudi

I love a certain amount, for it grows. I make it less than I can afford, and then add more later. I do spend and I am not cheap, but it is nice to save, even if you “blow” it on a vacation, or whatever shakes your boat. Then save some more…

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avatar Alan Schram

I woke up this morning, looked around the web a bit, and this was the topic I decided to write about. So interesting that I then opened TweetDeck and saw you had posted about it too!

I love the discussion though, because it is so wonderfully personal. There is no way that anyone could simply declare a number or a percentage and say that everyone must save x%. While there are some rules of thumb (10% I guess) – it depends.

I like to think of it in terms of “healthy” and “unhealthy”. What’s a healthy savings percentage, and what is unhealthy? How can we move from unhealthy to healthy? At what point are we saving too much?

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avatar James Fowlkes

10% seems a good starting point. Your budget will tell you what you can and cannot do. Which is why having a monthly budget is essential to getting ahead financially. You can tell how much money you have left over at the end of each month and adjust from there.

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avatar Lazy Man

As noted percentages don’t work for everyone. If I think of a baseball player just signing a $70 million dollar contract, 10% might be a bit on the high side for he needs. Then again, we’ve heard of a lot of people spending a windfall quickly, so perhaps having the 10% is a good number.

In any case, I think you have to re-evaluate your progress often (or maybe once a year) and readjust to stay on track. I probably have some adjustments to make after the market’s performance this past year.

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avatar Gayle

Wait, what?! If I signed a $70 million contract, I’d save $60 million of it! (Maybe $50, and invest $10.) Fewer athletes would find themselves down and out in their 40′s if they’d saved more of their fatty pay cheques in their 20′s!

As a rule, I try to save more than I spend. This doesn’t work out on regular pay months, when I have to pay rent and bills (27% of income), and I spend between $1000-$1400 (34%-48%). But I save a *minimum* of $700 (24%). But a couple times a year, I get big bonuses, due to my salary structure. In March, I took home $13.4k. I spent $1k (excluding rent and bills). I think it probably made me happier than if I’d blown half of it on a designer bag or some crap like that.

This may be due to my personality and my desire to save up as much as possible so I can quit my job and chase my dream — to write, full-time — when I’m about 32. I’m 24, now. But I think for the most part, people would be better off if they spent just enough to keep themselves fed and reasonably comfortable, while leaving the rest for security, peace of mind and your family’s future. Find happiness in more intangible things. I find it in places like my husband (who earns much less than I do, btw), and in my job, which I find meaningful.

I hope I don’t sound too much like I’m on a high horse, here. I guess my own habits and values just demonstrate what Updegrave is quoted as saying in this article.

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avatar UH2L

I never know whether the discussion on how much to save includes 401K or IRA retirement savings or just liquid investments like cash.

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avatar SJ

And what % should be spent in order to meet living and happiness needs =)

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avatar RallyCap

As long as you don’t feel deprived, I say the more savings the better.

In regards to UH2L’s question, I think the minimum 10% savings should be in addition to retirement vehicles.

My savings break out as such (all percentages are of gross):
401K: 10% + 3.5% company match
HSA: 3.5%
Voluntary Pension: 3.0%
General Savings: 13.5% (some of this then goes to IRA’s)
Total: 33.5%

One of the “tricks” I used to get to these levels was to roll my debt snowball(s) right into savings snowballs.

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avatar Luke Landes ♦127,535 (Platinum)

One of the “tricks” I used to get to these levels was to roll my debt snowball(s) right into savings snowballs.

That is a fantastic idea!

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avatar UH2L

RallyCap,

Thanks for the input, but then I think there needs to be a “good enough” percentage for retirement savings. I have averaged 17% contributions in my 401K (= 3% match) this year, I’m still saving it, but it makes my savings rate seem lower.

Perhaps the suggested savings rates should be broken out into retirement and non-retirement and this might depend on one’s age, (or maybe not).

Atul

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avatar RallyCap

UH2L

I view retirement savings as exactly that; for retirement. A “good enough” percentage there is enough to allow you to retire on (based on your assumption of return, inflation, and lifestyle). For me, maxing out my 401K and my pension should meet my needs. I’m a strong proponent of modeling your retirement incomes versus just assuming x% is good enough.

For me, 5-10% of “other” savings is a good minimum to cover the unexpected. Things like loss of job, home/car repairs, and the like. A thousand dollar emergency fund is a great start, but is definitely something to continue building upon if your finances allow.

I could also see a third category of savings for specific goals: cars, home improvements, vacations, etc. I’ve been able to plan for most of these in my general monthly budget (i.e., put a $XXX planned expense in June for vacation).

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avatar Jacob

First and foremost, savings should be compared to expenses (as that is what the savings will eventually replace) rather than income. For low levels of expenses it makes more sense to use absolute numbers (people do need to eat) whereas for higher levels, relative numbers make more sense (you do not really need the super yacht).

Beyond that the percentage is directly related to how many years you wish to work until you retire. 15% pretty much corresponds to 30 years on the job. This is the most normal and why 15% is commonly recommended. Higher numbers, and you can retire earlier. Low numbers and it takes more than 30 years.

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avatar Frankilus

I love this article and it has inspired to me write my own; Being a Steward of your Assets | http://wealth360.blogspot.com/2009/05/being-steward-of-your-assets.html

Well, ultimately, I think the minimum should be:
1. If your company offers a 401k or 403b, save as much as you need to in order to get the company’s match. Like for me, it is at least 5% and the company matches with 10% of base salary.

2. Set up an automatic savings account that allows you to put aside at least 6 months of living expenses. I call it the automatic emergency fund. Once that has crossed the 3 – 6 month living expenses limit, set up a Roth IRA and add the rest there.

I think there are many creative ways to be a steward, but it is important to live the life you want to live, in a comfortable manner.
GREAT POST. THANKS>

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avatar Finance Junkie

I recommend using the prodigious accumulator of wealth (PAW) formula to determine if you are saving appropriately for retirement. The formula comes from “The Millionaire Next Door” and states that you are a PAW if your net worth exceeds the value obtained from the formula:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less than any inherited wealth, is what your net worth should be.”

Since we are a two income household, I modify the formula to use the average age of my wife and I.

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avatar RocketSurgery

Maybe this formula works better a little later in life? I am 27 and have had a salary of 50K pretax for three years. I had a couple of thousand in credit card debt to pay off at first but have been contributing about as much as I can. according to this formula (if I’m doing it right) means I should have a net worth of about 135K. This means I could only spend about 5K per year and that wouldn’t even cover the taxes I’ve paid. I don’t own any property and between investments and savings I have about 21K at this point while still paying off my student loans. Am I missing something here?

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avatar h. bear

Who in the world eats 25 chicken nuggets? Of course you get get sick of them at about 25 — you should be in the hospital having your stomach pumped at that point.

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avatar Luke Landes ♦127,535 (Platinum)

That is the point.

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avatar kmcs

I am 51 years old and have about 350,000 in 401K plans, mine and my husbands together. We have an emergency fund of approx 30,000 in liquid assets. We have no credit card debt. We have no first mortgage, but do have a home equity loan of approx 42,000, which had used to purchase vehicles.
Our home is worth approx 350,000 in todays market. I am currently contributing 10% pretax dollars to my 401K, which has a small match from my employer. My question is am I contributing enough? Do I need to increase it? My husband wants me to double the amount to 20%. That might make me struggle a little from paycheck to paycheck. Right now he is taking 600/month after taxes from my paycheck and putting it in a Vanguard account. Should we stop the Vanguard and increase the 401K? I am not willing to do both, it will be a little to stressful to have to watch my money that closely. I will also receive a pension from my employer of approx 2200/month at age 65.

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avatar caudillcrew10 ♦125 (Cent)

I think starting off at 10% and increasing later at a more stable time would be the best for me. I’m just starting off in life though and it has been difficult for me to make ends meet at times. I am a firm believer in making sure I save enough for the future, be that emergencies or retirement, even if I have to tighten the belt a little to do so. I am going to look into starting an emergency fund now and I’ll be reading around on here to find some useful info.

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avatar william

I started out 10% as I got raises I later moved to 15% in my 457. I also contribute 6.50% to my defined retirement and employer adds 6.95% and I add 5% to my HSA. My goal is to increase more to 457 as raises and kids move on and i can reduce my insurance premiums and HSA.
william

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avatar Timothy Brusky

i have a 401k 27% before taxes
50% checking
25% savings 1
24% saving 2

tis has worked for me for some time, why 50% into checking most of all bills get paid in that account. why 2 savings? savings 1 is for in case of emerergy, saving 2 is never to be touch rearly! it might not seem like a great percentage to be at, but i have a budget all worked out to $2,500 and with bills and the budget on the $2,500 it leaves me with $820 extra with all that, if i make more than $2,500 its extra because my paychecks goes from $850, $775, $750, $650, $550 depends im a OTR driver depends on the milegae i drive durning the week, i get paid weekly every tuesday.. weekly pay is so much beteter than every other week!

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avatar acajudi

Who knows if we will live to retirement? Will the dollars be worth a penny or least? Will a loaf of
bread cost 10k or more? Please remember Zimbabwe and Agentina financial disasters?
If you can just generate an extra income during e
retirement and stay out of debt, Live below your means. I am 68 and retired at 58, but after two years i went into another career and I love it.

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