#12: Proportional Savings

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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