Updated on 08.28.14

#12: Proportional Savings

Trent Hamm

25 Rules to Grow Rich By

This is part of a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

How Much Should I Save?

Rule #12: If you’re not saving 10% of your salary, you aren’t saving enough.

This rule has more class bias in it than almost any other rule on this list. It completely ignores the realities of the working class and of the lower middle class and lets the upper middle class, who really should be saving more than 10% of their salary, off the hook.

For example, a single mother who brings home $20,000 a year is supposed to be saving $2,000 of that? The simple fact of the matter is that she can’t and it’s dangerous for the living situation of her and her child if she tries. There is no money to shave off in that situation; the mother’s focus should be in ensuring healthy food and good education for that child so that child isn’t stuck in the same situation. If that mother can sock away a few dollars, that’s great, but saying that anything less than $2,000 isn’t enough is ignoring the economic reality.

On the other hand, let’s look at a married couple bringing in $240,000 per year. Should they only be saving $24,000 a year? They should be saving a lot more than that – if not, they’re spending at a frightening rate and will be working until very late in their lives. Their savings and investments should be exceeding $40,000 a year, easily.

A Better Way to Figure Out How Much to Save

How can both realities be reconciled into a single rule? It’s quite easy, actually; there should be a minimum threshold for living, then above that you should be socking away about 20% of what you bring in for a rainy day. In today’s world, that bare minimum is probably in the $20,000 a year range, but it might be a bit higher than that and will be higher very soon.

Let’s look at an intermediate situation. If a couple brings in $100,000 a year, the Money Magazine rule states they should be saving about $10,000 a year. At that rate, to continue their $100,000-level existence at retirement, they’ll have to work until they are in their seventies. Under the revised rule, the couple would have to save 20% of $80,000, or $16,000 a year. This is a much more healthy target that enables them to retire much earlier and there’s only a $6,000 a year difference, an amount that can easily replace a vehicle payment or a latte each day.

So, let’s rewrite that rule – for now:

Rewritten Rule #12: If you’re not saving 20% of all of your income in excess of $20,000, you aren’t saving enough.

You can jump ahead to rule #13 or jump back to rule #11.

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  1. MoneyFwd says:

    I think you’re in the right direction with this, except for the minimum. I don’t think you can give a dollar amount that would really work for everyone. In my situation, I get paid well over $20k a year, but because of my living expenses and paying for tuition and for my fiance, I have very little I can put away (if anything usually). I think the new rule should say something like “If you are not saving 20% of your income when more than 120% of your income covers savings plus all living expenses, then you’re not saving enough.” This takes care of individuals who make a lot more than $20k but are living on the edge without a choice.

  2. This article is absolutely stellar, and I’ll definitely be adding The Simple Dollar to my blogroll because of it (also because I like the site in general, of course). The relative value of a dollar is far too often neglected by personal finance bloggers (and personal finance writers in general), and I appreciate also the social awareness that this kind of observation implies.

    Thanks for an awesome article and an excellent blog.

  3. John Osmond says:

    Is this 20% (or 10%) of pre-tax or post-tax income?

    Do pension fund contributions count as part of the 20% (or 10%)?


  4. John Osmond says:

    Is that pre or post tax income?

  5. Kat says:

    Even the revised rule doesn’t work. I make more than 20k, but I have student loans and live in a high cost of living area. My salary doesn’t go as far as it would in say, Iowa.

  6. Lisa says:

    I would revise the rule to say simply you should save as much as you can. This article does not take into account items such as christmas and birthday gifts, work bonuses, and tax returns that can be safely socked away. It does not take into account different life situations; I make about $25k a year but can save much more than the hypothetical single parent as I don’t have kids or debts, and I refuse car ownership and a host of other expensive things; I can save way more than $1k a year.

  7. Phil says:

    Would you consider your mortgage as part of this investment?

    The reasoning is that you are building equity of some sort. Though I can see it on the flipside as it just being an expense

  8. Kris says:

    I disagree with your re-write and your assertion that someone making 20k can’t save 2k a year.The whole 10% thing is a habit, and once your in the habit it doesn’t matter how much you make you have a habit of putting 10% away. The problem is that parents no longer teach that to their kids so the habit never gets developed.

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