I recently read a Nerdwallet article that claimed to sum up all the personal finance advice you need in just 6 words. Those words were: “Live off of 80% of your income.” However, I’d argue personal finance is a bit more complicated than that! And depending on your goals, saving 20% of your income may not be enough. Here’s why I save more than 20% of my income, plus some tips to help you determine your ideal savings rate.
How Much Income Do I Save?
Many personal finance experts suggest saving 20% of your income as a guideline. However, I’ve always thought that sounded low. If you’re trying to save for multiple goals like retirement, buying a house, and sending your child to college, you probably can’t do all that on 20% of your income (unless you’re a high-earner). I’m usually juggling multiple financial priorities and trying to make the most of my money, so I aim to save more.
Right now my partner and I save about 50% of our take-home pay (on top of our 401k contribution) because we have big financial goals. We want to pay off our home before we turn 35 and save enough to “CoastFIRE.”
CoastFIRE basically means you front-load your retirement contributions. If you make large 401k contributions early in your career, you can accumulate enough money to fund a traditional retirement after just a decade or two of working. Your savings have to compound and earn interest for a few more decades once you hit your CoastFIRE. So you still have to work to pay for your regular bills and expenses. But you can usually dial back on work when you achieve CoastFIRE because you don’t have to include retirement contributions in your budget anymore.
However, I realize this approach to saving isn’t right for everyone. Admittedly, we don’t have a lot of disposable income to spend on entertainment because we’re squirreling it away for retirement. We keep ourselves busy with frugal hobbies like reading and gardening instead of eating out or going on trips. But if you value travel or love to try new restaurants, this aggressive saving strategy may not work for you.
So what’s the ideal savings percentage?
What Is The Ideal Savings Percentage?
I think the ideal savings percentage is whatever allows you to meet your financial goals while still enjoying your life. If you have frugal hobbies like me, you may be able to save a large portion of your income without making yourself miserable. I’m happy with my laid-back, simple life, but I know it’s not for everyone.
If you have more expensive passions like fixing up vintage cars or skiing, you’ll probably need to include more spending money in your budget. You have to budget for the life you actually want, within reason of course. You shouldn’t spend half your paycheck on your hobbies, but you shouldn’t save so much that you feel totally deprived either.
The point of a budget isn’t to suck all the joy and fun out of life. Budgeting just gives each dollar a job so you know where your money is going. It also helps you plan and prioritize your spending. After making a budget, you may realize that you can’t eat out twice a week while saving up a down payment for a home, so you’ll have to make a choice between them.
Putting all your expenses and savings goals down on a spreadsheet enables you to manage your finances more intentionally. Instead of spending money on autopilot and saving whatever’s left over, you’ll be able to determine the best way to utilize your income based on your ideal lifestyle and financial goals.
Although a 20% savings rate isn’t enough for me to reach my goals, it may be just right for you. But you won’t know until you make a concrete budget, so break out that spreadsheet!
Do you know what your savings rate is? Are you happy with your current save-spend balance or do you want to make some adjustments? Share your thoughts in the comments!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
Saving 50% of your income is a great achievement. Im currently working on 35% of my income. Building my emergency fund up too 10 grand. Once Thats done im planning on investing 50% of mt income for the make up years of being dumb with my money in my younger days.