Here’s our 4-step framework to help you hone in on a savings rate that’s right for you.
If you ask 10 different people how much to save per year to set yourself up for a secure financial future, you will probably get at least 15 different answers. Talk about confusing!
And even if you go with the most common answer to “how much do I need to save,” which may be 10 to 15 percent of your gross income each year, that might still not get you to the right answer for you.
(Spoiler alert: 10-15 percent probably isn’t going to be enough.)
So how do you figure out this complicated, confusing question of how much to save – this question that EVERYONE, regardless of income or financial status or goals that they have, needs to ask and answer?
In this podcast episode, we walk through the following framework so you can make a personal decision that works for you:
Step 1 to Determine How Much to Save: Know Your Goals
You need to know what your goals are, how much they cost, when they will show up in your life (or at least, when you expect them to do so), and how long you think they will take to achieve.
In general, the more aggressive your goals – meaning, the more expensive they are, the faster you want to achieve them – the more you need to save to fund them.
When we’re talking about “how much to save every year,” we’re usually talking about goals like retirement, financial freedom, or early retirement.
What that actually means is saving so that you can afford the lifestyle you want, when you want it (i.e., you want to retire at a certain age and be able to do specific things without having to earn income from a job to afford those things).
This is separate from other short-term goals that are really more like spending needs rather than long-term financial goals.
If you want to buy a car, for example, you can look at the cost of the car and create a savings plan to build up the cash neeeded to buy it or make a down payment.
Whatever you save toward those smaller, more immediate spending goals is not part of your overall, long-term savings rate that we’re talking about here.
This is money we’re talking about putting away and investing for future growth. Everything vies for the same amount of available dollars, which is why it’s critical to understand all your goals, how they fit into context with each other, and what your priorities are.
Step 2: Temper Your Expectations Around Investment Returns
Because this is long-term money, we assume any money that’s part of your annual savings rate is going to a long-term investment account, like a retirement or brokerage account. This is money that you will invest today and leave invested for 15, 20, or more years.
Based on that, you should be able to expect some amount of return on that money. In other words, you don’t have to do all the heavy lifting to get to an ultimate goal achievement number: your money is busy earning more money, too
But be careful how much money you assume you’ll get from your investments. You want to consider a savings rate that will work for you when combined with a reasonable expected rate of return from your investments.
We feel 5 to 7 percent is a good range to consider if you’re looking at the long term.
Don’t rely on extremely aggressive investment expectations to determine how much you need to save. If you assume you’re going to get a 10-12 percent return, you likely won’t save enough because you’re banking on that (unrealistic) rate of return.
Remember that the more you save, the less risk you’re forcing yourself to take to make up for it. And the more you save, the less you have to rely on external factors that you can’t control (i.e, market performance).
The control you have is your savings rate.
Step 3: Be Realistic About Your Financial Situation; Prioritize Consistency and Sustainability
When considering how much you need to save, keep in mind this is something you need to do year over year over year – for decades of time.
It can be overwhelming to think about it that way, but that’s the reality we all face when we need to build our own wealth: this is a marathon, not a sprint.
That means we need to settle into a pace we can sustain and remain generally consistent with over time, even as goals shift, priorities change, and life evolves.
That big-picture, longest-term goal of “financial stability” – whatever that looks like to you – is probably the most static, concrete goal you can have even as everything else is in some degree of flux or development or change.
So to keep on track to meeting that goal, we have to maintain a consistent savings rate for it… despite all else that might come up in life.
Be realistic about your own financial situation when setting a savings rate. Going to extremes is usually not sustainable for most people, and it’s more important to find a moderate level of savings that won’t leave you feeling burnt out or extremely deprived than it is to save the absolute most you possibly can.
You can always increase your savings rate as you go and gain confidence in what you are capable of managing and achieving.
Step 4: Allow Other Sources of Income to Temper How Much to Save
Be careful with this, but it is worth considering: some people will have other sources of income than their own savings in the future, and that will impact how much you need to save.
If you have an inheritance that you feel confident you’ll receive, a pension, expect Social Security to replace a large percentage of your current income, or another circumstance that will allow you to receive earnings even after you stop working, then you may not need to save as much.
That doesn’t mean save nothing! It’s still important that you build assets that you control, rather than relying entirely on external sources.
Actually Choosing How Much to Save: Honing in on a Specific Savings Rate
When it comes to choosing a savings rate, start with these reminders:
- Your savings rate is what you save of your gross income
- Choose a percentage, not a dollar amount; this keeps your savings relative to your income and helps guard against lifestyle inflation
In this episode, we have a full conversation on specific savings rates. You can get a quick rundown here:
- Less than 10 percent is probably not sufficient to get you to a secure retirement.
- 10 to 15 percent is a good base level of savings, especially if you’re doing it extremely consistently year after year. This is great if you’re making under $100,000; you should be saving more if you’re making $100,000 or more.
- 15 to 20 percent is the absolute minimum you should be saving if you earn six figures or more.
- 20-25 percent is our guideline for our clients. This is your target once you’re earning $250,000 or more.
- More than 25 percent may be necessary if you have very aggressive goals – for example, you’re in your 30s and want to retire in your 40s or 50s.
That’s the recap. Now jump into the full conversation here:
Further Reading & Links from This Episode on How Much to Save in 2023
- Here’s how (and why) we save 30 to 40 percent of our income most years…
- …and why that number will be lower in 2023 for us
- Our savings and spending guidelines for our financial planning clients
- How to sort through competing priorities and goals when there’s only so much money to go around
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