How Much to Save

"How much should I save?" has no single right answer, which is why the question so often goes unanswered and the default becomes whatever is left over. This chapter gives you a way to find your own number: how to measure what you save now, what the common rules of thumb are and where they come from, why a few percentage points matter far more than they appear to, and how to raise your rate without feeling the cut.

Measure it first: your savings rate

Your savings rate is the share of your income that you keep rather than spend. It is the single most useful number in personal finance, because it captures both sides of the budget at once: how much you earn and how much you live on.

There are two common ways to measure it, and either works as long as you stay consistent:

• Against gross pay (before tax). This is how most retirement guidance is written, and it makes workplace contributions easy to count, since they are set as a percentage of gross pay.
• Against take-home pay (after tax). This is closer to how a budget feels, and it is the measure used for planning financial independence: savings divided by savings plus spending.

Count everything that builds your future: workplace retirement contributions, IRA and HSA contributions, transfers to savings and brokerage accounts, and extra payments on debt principal if you choose to. Keep an employer match as a separate line. It is real money, but it is not something you gave up spending.

The savings rate calculator works this out from a few numbers and shows how your rate compares with households of your age.

The rules of thumb, and what they assume

The 50/30/20 split. Popularized by Elizabeth Warren and Amelia Warren Tyagi in their 2005 book All Your Worth, it divides take-home pay into 50% for needs, 30% for wants and 20% for saving and paying down debt. It is a sensible starting frame. It works less well where housing alone takes more than half of take-home pay, which is common in expensive cities, and it gives no guidance on where the 20% should go.

Fifteen percent for retirement. A widely quoted guideline in the retirement-planning industry is to save around 15% of gross pay for retirement over a working life, counting any employer match. It assumes a start in your twenties or early thirties and a conventional retirement age. Starting later, or wanting to stop work earlier, pushes the figure up.

Pay yourself first. Less a number than a method: decide the amount in advance and move it on payday, as chapter 1 describes. Whatever rule you choose, this is how it actually happens.

These rules are starting points. The right rate for you depends on what you are saving for, how soon, and what you already have.

Why a few points matter so much

A higher savings rate helps twice. It adds more each month, and it means you are living on less, so the amount you eventually need to replace your income is smaller. The examples below follow one household that takes home the same pay in each case; whatever it does not save, it spends. The target is a portfolio that could pay out its yearly spending at a 4% withdrawal rate, assuming a 7% return before inflation and 3% inflation. They ignore Social Security and pensions, which would shorten every timeline, so read them as a comparison rather than a forecast.

Saving $500 a month while spending $54,000 a year, the household would need $1,350,000 and would take about 59.3 years to get there: longer than a working life. At $1,000 a month the target falls to $1,200,000 and the wait to about 41.3 years. At $1,500 a month it is $1,050,000 in about 30.8 years. Going from roughly 10% to 30% of take-home pay cuts the time by almost half, because the target shrinks while the savings grow.

The point is not that everyone should save 30%. It is that the savings rate is the lever with the most effect on when you can choose to stop working, and on how resilient your finances are along the way.

Finding a rate you can keep

A rate you abandon after three months does less than a smaller rate you keep for thirty years. A useful way to think about it is in two phases.

The foundation phase. While you are building an emergency fund and paying off high-interest debt, most of your saving capacity goes there, plus at least enough to capture any employer match. Chapters 3 and 4 cover the emergency fund, and chapter 8 sets out a common order for these priorities.

The building phase. Once the foundation is in place, the money that went to the emergency fund and debt can move to retirement accounts and specific goals. Many people find their savings rate jumps at this point without any change in spending, simply because a debt payment has ended.

Life stage matters too. Early careers often have low pay and high fixed costs, so a modest rate that rises with each raise is realistic. Mid-career, with higher pay, is often the best window to push the rate up. In the decade or so before retirement, catch-up contribution limits allow larger tax-advantaged contributions; Volume 1 of the retirement shelf covers them.

Raise it one percent at a time

The least painful way to save more is in small, automatic steps. An increase of one percent of pay is rarely noticeable, especially when it coincides with a raise.

For a take-home pay where one percent is $50 a month, that single step, invested at an assumed 7.0% for 25 years, grows to about $39,152, of which $15,000 is the money put in. Repeat the step once a year and the effect compounds.

Three ways to make the increases happen without relying on memory:

1. Automatic escalation. Many workplace plans offer an automatic increase of one percentage point a year, often up to a cap you choose. It is the Save More Tomorrow idea built into the plan.
2. Raise splitting. Decide in advance what share of each raise goes to savings, for example half, and change your transfer on the day the raise arrives.
3. A windfall rule. Decide now what share of any bonus, tax refund or gift you will save. Because windfalls sit in a mental bucket marked "extra", saving a fixed share of them feels painless.