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Financial Rules of Thumb Series – Is Saving 10% Enough?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

Saving 10% of your income is often tossed out as a solid rule of thumb.  Is it a good rule of thumb?

The Upperline: Generally solid advice, but you should run the numbers to see if you need to save more, or if you can afford to save less.

If you’ve started saving at a young age and are spending within your means, 10% may be enough.  Use one of the tools online or contact a fee-only financial planner to help you get some clarity on what it will take to retire the way you want to retire.  Liz Weston suggests what I think may be a better rule of thumb, which is “Save 10% for basics, 15% for comfort, 20% to escape.

Now, some common misconceptions about saving:

I’m saving 10% in my 401(k), so I’m on track.

Saving in your 401(k) or other retirement plan at work is a great step in securing your financial future.  My main concern here is that while having tax-deferred savings is great, you’ll want to have some savings that you can get your hands on before retirement, in an emergency fund or some other investments.  Things happen, and you’ll need to replace your air conditioner, or pay some medical bills at some point, and you can’t (strikethrough) probably don’t want to raid your retirement to pay for that.  Stay on track with your retirement savings, and start setting some money aside in your savings account for a rainy day.

I can’t save that much, so why bother?  I’ll just have to work forever anyway.

It’s natural for us as humans to see a goal that looks far too far away for us to reach, and we get discouraged.  Frustrated by what we feel is a lack of progress, we do nothing.  Even if you can only save 1% of your pay, that’s magnitudes better than 0%.  Then, take a few more steps towards your goal by:- Paying yourself when you pay off other debts.  Have a car loan that you’re close to paying off?  Set up an automatic transfer from your checking to savings once it is paid off, in the amount of the car loan.  You’re used to making that payment, now pay yourself and set that money aside for the future.  When you get raises, set up an automatic deposit into savings  for part of that raise.  Take some to spend and automatically save the balance for your future goals.

Remember – additional debt payments count as savings

If you’re paying off debts on an accelerated schedule, remember to count that money in your savings total.  It’s money that you were going to have to repay anyway, but you’re paying it off sooner than you needed to.  Pat yourself on the back and be sure to credit those extra payments towards your “savings” target.  Just be sure you only count the extra portion not the part you’d have to pay regularly.

(Big thanks to my friend @RussThornton of Wealthcare Capital for giving me a 2nd opinion on this piece)

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