The Proper Rate Of Savings

Fortunately for savers, banks and brokerages have made it much easier to put savings on auto-pilot than it used to be. Before the days of online savings accounts and ACH transfers people actually had to sit down and write a check to savings, or deposit cash into their savings accounts. Sounds archaic, I know, but it did separate the disciplined savers from the free-spirited spenders.

Today we have a variety of ways to save for retirement, rainy days and big goals. But deciding just how much to save is the tough part. Financial gurus all have their own numbers – 15% for retirement, 10% of your overall income, half of your income – I could go on forever. However, deciding how much to save is a personal decision that looks more like a balancing act than a hard, fast rule. After all, there are many competing priorities for our money.

The 10% rule

One of the more established ideas is to simply save 10% of your income. If you earn $50,000 a year, under this plan you should be putting away about $5,000 a year into a variety of investments and cash savings accounts. 10% should not be enough to break your budget, but it doesn’t cause you to stretch very far either. I prefer to aim higher with my rate of savings, but how much higher?

Dave Says 15% For Retirement

Dave Ramsey, the popular radio and television talk show host, advocates putting aside 15% of your income towards retirement. Using our last example, that would be $7,500 a year on a $50,000 income, or $625 a month. Dropping $625 a month across your 401(k) and maybe a Roth IRA seems like a good idea, but it will be hard to pull off if you have an over-sized mortgage, credit card debt, or a couple car loans. That’s why Ramsey advises listeners to get out of debt and save a cash emergency fund first.

The 50% Plan

If I could go back in time and talk to my 20 year-old self, I would tell him to save 50% of his income from the first day on the job. For every year you save half your paycheck, and live on the other half, you buy one year of freedom from earning an income. Sure, saving half your income now seems ludicrous, but that’s because we’ve allocated our income to paying for our expensive possessions, like our house, our car and our hobbies. If we lived on half our income from the beginning, it would have forced us into a smaller home, a cheaper car and more frugal hobbies (and tastes).

What Percentage of My Income Is Going To Savings?

About 20%. That number should increase as we continue to pay off debt, but for now I’m content with an 80/20 split of paying off debt and slowly building our emergency fund. When the emergency fund is maxed, I’ll redirect the money going there to a Roth IRA. When that’s maxed I’ll begin investing in taxable investments and social lending at Lending Club to hopefully fund my early retirement. Somewhere in there I also have two kids’ college savings plans to fund. Like I said earlier, lots of competing priorities!

How about you? How much are you currently socking away in savings?

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