How Much Money to Save (Savings Rate)

Personal Finance School Saving Money How Much Money to Save (Savings Rate)

The savings rate is calculated by looking at how much money you save relative to your total income earned. For example, if you make $60,000 per year and you save $6,000 of it then you’re savings rate would be 10% of your income.

So what percentage of your income should you save away each year?

Determining your ideal savings rate as a percentage of your income depends on your financial goals, current financial situation, and lifestyle. Ideally, you want to increase the savings rate as high as possible. This will be easier to do if you can grow your income and learn to live off less of it, saving away the bulk of your income.

Here’s a guide to help you determine an appropriate savings rate:

Ways to Determine Your Ideal Savings Rate

1. Start with the 50/30/20 Rule:

  • A commonly recommended guideline is the 50/30/20 rule, which suggests allocating your after-tax income as follows:
    • 50% for essential expenses (housing, utilities, groceries, transportation).
    • 30% for discretionary spending (entertainment, dining out, non-essential purchases).
    • 20% for savings and debt repayment.

2. Emergency Fund:

  • Prioritize building an emergency fund that covers three to six months’ worth of essential expenses. To do this, allocate a portion of your savings rate until your emergency fund is fully funded.

3. Debt Repayment:

  • If you have high-interest debt (e.g., credit card debt), allocate a portion of your savings rate to pay it off as quickly as possible.

4. Short-Term Goals:

  • If you have short-term financial goals (e.g., a vacation, a down payment on a car), allocate a portion of your savings rate toward these goals.

5. Retirement Savings:

  • Aim to save at least 15% of your pre-tax income for retirement. This includes contributions to employer-sponsored retirement plans (e.g., 401(k)) and individual retirement accounts (IRAs).

6. Long-Term Goals:

  • Consider long-term goals like buying a home, funding your children’s education, or achieving financial independence. Allocate a portion of your savings rate to these goals.

7. Adjust Based on Your Situation:

  • Your savings rate should be flexible and adaptable to changes in your life, such as pay raises, unexpected expenses, or new financial goals.

8. Gradually Increase Your Savings Rate:

  • If your current savings rate is below your goals, aim to increase it gradually over time. Small increases can make a significant difference in the long run.

9. Monitor and Adjust:

  • Regularly review your financial goals and savings progress. Adjust your savings rate as needed to ensure you’re on track to meet your objectives.

Remember that your savings rate is a personal decision, and there is no one-size-fits-all approach. It’s essential to strike a balance between saving for the future and enjoying your present lifestyle. The key is to find a savings rate that aligns with your goals and allows you to achieve financial security and peace of mind.