We originally wrote this piece to compliment our Beyond Finances podcast episode on The 3-Part System We Use to Save 40 Percent (or More) of Our Income, and published it on Forbes. We’re republishing a slightly different version of it here, too, if you’d like to pair it with episode 25 of the show.
Do you know how much money you save right now? And more importantly… do you know if it’s enough?
Percent of income saved is one of the leading metrics we use at Beyond Your Hammock to determine if our clients (and ourselves) are on the right track to meet their biggest goals.
Specifically, your savings rate is the percentage of your gross income that you put toward long-term goals.
That includes everything from traditional retirement to affording a more expensive lifestyle or enjoying a more non-traditional approach to making work optional: financial freedom.
Holding really big (as in, expensive) financial goals, or gunning for something like financial independence, means your ideal savings rate should be at least 20% of your gross income.
At least. To be honest with you, that’s a bare-minimum range. The more realistic target to aim for? That’s more like 30 to 40 percent of income saved.
Here’s why that should be your benchmark to meet or beat, and a 3-step process you can try on to help you achieve this goal.
Why Aiming for 30 to 40 Percent of Income Saved Sets You Up for Success
There’s no universal law of nature that requires you to have a certain percent of income saved. It’s a rule of thumb we use at BYH and in our own personal lives…
But we use it for a reason. It’s based on the goals we and our clients want to achieve, which tend to be a little more complex than just “buy house, have kid, and pray we can quit working by 70.”
(Part of the reason for the complexity is because those items are often in the mix — but they are just a few of the many goals clients want to achieve. Those things are more like table stakes; the things that require the serious planning happen because there are about 7 more goals on that list!)
Let’s say you started earning an income around 22, after you graduated college. If your main plan is to keep working and earning that paycheck until 70, at which point you’ll retire to a modest life of leisure — well, in that case, the more traditional rule of thumb that says to save 10-15% of your income throughout your working years is probably sufficient.
Saving 15% of your gross income or less, however, is not sufficient for reaching financial freedom in your 40s, 50s, or even 60s.
It’s also not sufficient for retiring by 60 and fully funding college tuition for two kids and quitting your job at 40 to start your own business and paying for weeklong vacations to Europe each year from now until retirement.
For that, you need to start looking at putting away (at least) 20% to long-term investments…
…but again, if we’re planning conservatively — which means we’re looking to save more than you need to reach all your goals so you can ensure the funds are there to achieve them — that’s where we start talking about those 30-40% numbers.
Do You Need to Achieve More Than 40 Percent of Income Saved?
Some experts will suggest saving even more. Fans of the FIRE movement, for example, tend to cheer for hitting 60-70 percent of income saved.
(Although, to be honest with you, we tend to hesitate calling any of them experts. While they have cool stories, most aren’t trained, educated, and certified professionals when it comes to creating plans for others or doling out financial advice that applies to a unique situation outside of their own lives).
You’re more than welcome to hit bigger targets, of course, but there is one really big reason I tend to advocate for the range of 30-40% percent of income saved for most people:
You get to build up to an ideal lifestyle in the future… while still enjoying your life right now.
Saving 30-40% still represents a significant chunk of your gross income. Remember that once you account for that amount going to long-term savings, you still need to pay taxes, fixed living expenses, and have money for all the other spending you need (or want) to do.
And yes, I think the spending you want to do, but don’t necessarily have to do, deserves a place in this conversation. Look, I’m a financial planner. Planning for the future is a huge priority for me.
You don’t have to put your life on hold until you have “enough” money or go to extremes to meet your goals.
While many FIRE enthusiasts are die-hard frugality fans, I prefer helping my clients create balance between enjoying life now with planning responsibly for tomorrow, because now is the only thing that we really have to count on.
No one assumes they’ll keel over tomorrow, but life makes us no promises or guarantees.
Getting to 30-40 percent of income saved usually allows people to get to a point where work becomes optional by their 50s or 60s, depending on their lifestyle and expenses they want to maintain.
In the meantime, it can leave a little bit of money in your bank account to use freely on the things you want right now so you’re not just waiting around for 10-30 years to actually start living.
While that’s not as exciting as headlines that proclaim “employee #3 of tech startup retires at 30 after living exclusively off company cafeteria leftovers” or whatever the latest trending storyline is… it is a more realistic approach.
It also tends to be a more appealing method to people who don’t loathe their jobs to the extreme that they want to quit working forever before they even hit 35 years old — and most of the people I work with actually enjoy their careers and would like to stay engaged with their work until mid-life.
At that point, they’re most interested in having the choice to continue or not on their terms; a 30-40% savings rate allows them to meet this future goal without sacrificing what they want to enjoy in the present.
A 3-Step Process to Help You Start Saving 30-40% of Your Income
So if you’re on board with the idea of saving 30-40% of your income, the logical question to ask is probably how.
How do you manage this, and actually make it happen?
The very first thing to do is to know where you’re starting from right now. What’s your income today and how much are you currently saving?
When you look at your numbers, remember that money you “save” for the short-term doesn’t count.
Anything you set aside in cash that you plan to use in the next 12 months to 5 years (for a trip, a car, a house, a new computer, etc) should not be included in your “savings rate” for the purposes of long-term financial freedom goals.
Money you save to spend within the next 1 to 5 years is important – but it’s more like glorified spending rather than true saving for goals like financial independence.
Savings and investments that count toward your savings rate include funds that you will keep invested for the next 10, 20, even 30 years. This probably includes things like:
- Funds invested in retirement plans and accounts (401(k) plans, 403(b)s, pension plans, and any IRAs you have — Roth, traditional, SEP, SIMPLE, etc)
- Money you contribute to health savings accounts and keep invested into funds within the account. It doesn’t count if you spend it on healthcare costs!
- Non-retirement accounts that you invest in for the long-term, like individual or joint taxable brokerage accounts
So, for example, if you earn $100,000 and you save $10,000 annually to your 401(k), put $1,000 into your HSA every year, and max out your Roth IRA at $6,000, then your total savings = $17,000.
And $17,000 represents 17% of a $100,000 gross income, so 17% is your savings rate. Once you determine your current rate, you can begin the 3-step process to increase it up to 30-40%.
Step 1: Set Your Savings Rate Target
This should come as no surprise to you at this point — but I suggest you set your goal in the 30-40% range.
Regardless of the specific amount you choose, keep it in percent format.
This is a good way to guard against lifestyle creep. If your income goes up and your goal is to save a percentage of what you earn, then your total dollar amounts saved go up automatically, too.
Similarly, if your income goes down, the dollar amounts you’re saving should adjust accordingly, as well. This will keep your income and your savings targets relative, so you’re not left stressing out about an unrealistic goal.
Step 2: Design Your Savings System
When it comes to meeting our own goals around percent of income saved, Kali and I rely heavily on a system to make sure the right actions get done at the right time. That means we automate contributions to our accounts as much as possible.
Here’s how you can do the same:
1. Give your money a job: Money doesn’t just hang around in our bank account. As soon as we have “extra” cash, that money gets moved to the appropriate location because it has a purpose – it’s helping us get to long-term financial freedom, for example, or to access short- or mid-term investment opportunities.
“Extra” cash is anything over and beyond what you need for emergency savings, monthly expenses, and short-term goals.
2. Know your savings vehicles: Once you know the purpose for your money, it’s much easier to match it to the right account that aligns with that purpose.
Appropriate vehicles might include retirement accounts (through work and things you can open on your own like IRAs or HSAs) and brokerage accounts.
Within those accounts, you can adjust the portfolio of invested funds to be more aggressive (for long-term investments) or much more conservative (for shorter-term investments).
3. Divvy up your cash: Once you determine your savings rate, determine how many dollars per month need to go to which accounts you’re going to use to help you meet your goals.
Set up automated contributions so you remove the need to make that decision to save each month; it just happens.
The more you can take yourself out of the process – meaning, the less decisions you make about where money goes, how much you transfer, and when you make those contributions – the easier it will be to stick to your plan over time and achieve your desired percent of income saved.
You’ll have to revisit this piece of the plan quarterly or annually to ensure those dollar amounts add up to a total amount that corresponds to your set savings rate target.
Step 3: Focus on What You Can Control with Your Cash Flow
This means looking at what you can influence with your income, and what you can control with your expenses.
For us, managing expenses really comes down to spending on what we value and cutting the rest. This requires you to:
- Get very clear on what actually matters to you. This is a process, and it’s something we still work on.
- Be confident in what you say yes to, and what you say no to – and you will have to say no. You will have to turn down things you want to do in the moment to prioritize what is most important to you over the long term.
- Pay attention to the little stuff… but know you have to get the big stuff right even it only comes up every once in a while. Don’t overspend on things like your housing, cars, or let lifestyle creep get out of control over time.
Controlling your cash flow also means staying engaged in the financial conversation. My wife and I are constantly asking questions about our values, our spending, our goals, and more.
We try to be mindful and aware, both when we sit down for long-term planning and when we’re in the moment.
We ask questions like, “how excited do you feel about this thing? Are you going to feel like you missed out if you don’t have this experience or go to this event? Is this truly something we feel good about spending money on or does it not really align with our values?”
This process allows us to really tune in to what we really want and what we get the most value out of. It helps us avoid getting caught up in chasing experiences that aren’t really as fulfilling as we hoped they’d be.
And of course, we keep a budget – but it’s everything else listed above that helps us maintain and stick to that set budget over time.
On the income side of things, we also look at what we feel we can control. We make decisions that we believe will boost our total household income.
These days, that’s usually around reinvesting in the business we own and work within so we can add value, enhance the service provided, and therefore attract more clients who want to be part of what we’re doing.
But in the past, it was the initial decision to pursue self-employment in the first place. And my wife still makes that choice in little ways all the time – even though she works full-time within in the business, she also regularly seeks out additional freelance gigs.
She loves that work and it’s something she would do (and has done) even when it doesn’t pay. She’s a writer, so her freelance writing brings her joy.
It’s a literal bonus that 9 times out of 10, it brings in extra money that can be added to the amount we save.
Achieving 30-40 Percent Of Income Saved Is Never Easy – But It Can Be Possible
Ultimately, the act of saving money is never easy to do. Depending on your situation, circumstances, experiences, and obligations, saving even a single dollar can feel as challenging as saving $10,000.
I will never tell you this work is so easy anyone can do it. All the determination in the world isn’t always enough (although the will to act certainly helps; it’s just not the only thing that you need on your side).
Saving money, especially when you start talking about saving almost half of what you mean, takes commitment and work. It takes a colossal effort not just to start the process or set up the system, but also to consistently stick with the strategy and manage this whole thing over time.
To make the right choices over and over again. To choose the work over easier routes. To choose to take responsibility and focus on what you can control, even in the face of things that don’t feel right or fair.
It’s not easy, but it is possible to increase your savings rate.
These 3 steps — setting your target, developing your system, and focusing on what you can control in your cash flow — are a great place to begin.