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How Much of My Paycheck Should I Save?

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Everyone always wants to know the magic number to save.  Is it a dollar amount?  Is it a percentage of your income? 

The answer?  It depends.

There isn’t one magic number for everyone.  How can there be?  Everyone’s situation is different. Everyone’s comfort level is different. Some people feel like they need less money in the bank to feel comfortable. Some people need quite a bit sitting there in the bank to sleep at night. Take a minute and figure out what that number is for you. If you are saving with a partner, sit down with them and discuss numbers. Throw out a couple of numbers or benchmarks and see how each of them make you feel.

If you’re paying down debt, you might be saving less because you’re trying to eliminate that debt.  If you’re making less, you might not be able to save as much until you start making more.

My personal take on it is that you should absolutely be saving a minimum of 10%, but you should be targeting 25%+ as your income increases.

American’s save 5% today.  We used to save around 15% back in the 1970s. Is that surprising? Not particularly given the possessions that people have or want these days. However, it is not a good sign for the future and not a good habit to be teaching to future generations.

After living through the crash in the late 2000s, it’s clear that nothing is guaranteed and no job is truly safe.  So even saving 10% may not be enough.  There’s no guarantee you’ll be employed for 30-40 years straight.  You might have a few years throughout that period that you’re not working or in transition.  If you don’t have an aggressive savings rate, it will be tough to deal with those gaps in employment. 

Try to save as much as you can while still living your life and enjoying the moment.  This is a tough balance for sure.  If you spend money now, you’re always adding more risk to the future, but if you save money now, you’re possibly eliminating an experience or something that will enhance your life in the moment.

So, what can you do?  Here’s one of the best ways to handle it.

Let’s say you start your career at age 22 and you’re making $40,000 in an entry level job.  Save 10% of your income or $4,000.  As you advance, change companies, get raises, etc. save half of each raise.  Got a raise for $5,000 to $45,000?  Save $2,500 of that and add $2,500 into your annual budget to increase some of your budget categories like eating out or shopping.  Now you’re saving $4,000 + $2,500 or $6,500 which is 14% of your income.

Another raise to $50,000?  Save $2,500 more.  Now you’re saving 18% of your income.  This method allows you to increase your savings and your lifestyle using a healthy, balanced approach.  It allows you to take advantage of raises on both sides of the coin: the saving side and the spending side.

Life happens.  This isn’t going to be a perfect system that you’ll be able to follow, but if you aim to do your best to save half of each raise your household gets over 30-40 years, you’ll be in such great shape.  And you won’t have to worry.

Start by saving 10% and keep moving your way up over time.  Don’t settle for being average. 5% is a scary average.

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