Chapter 13 – Personal Savings Rate

It’s now how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”  ~Robert Kiyosaki, author of Rich Dad, Poor Dad

In the last chapter, we discussed the best budget tools to help you track your expenses.  If you’ve been using these tools, hopefully you’re only spending 40-50% of your income on living expenses.  Spending more than 50% means you’re living above your means, while spending less than 40% on living expenses is living below your means.  Either way, the next step is to identify how much disposable income you have to save.  Disposable income is how much you have left after all your expenses and helps determine your personal savings rate.

Some certified financial planners would’ve recommended I put this chapter in the beginning, but I believe it’s important to have your living expenses covered first, then discuss savings.  Everything else after basic living expenses can be reduced or eliminated to make sure you save at least 10% of your paycheck.

Have you heard this before?  Save at least 10% of your paycheck.  We’ve all almost heard this before.  But if it’s so widespread, then is everyone doing it?  Unfortunately, the answer is no.  In December 2017, the Household Savings Rate was only at 2.4%.  The U.S. has hit a high of 17% in 1975 and a low of 1.9% in 2005.[1]

U.S. Savings Rate

Personally, I think 2.4% is high since most of the people I know are not only not saving money, but they’re also accumulating debt.  At the end of 2017, U.S. consumer debt of all types hit record highs which includes credit card, student, auto, and home loans.[2]  How about you?  Are you saving at least 10% of your income, or are you incurring more debt?  Some people may be doing both.  What is your personal savings rate?

Even though, as a nation, we struggle to meet the 10% savings rate, many middle-class individuals actually do find a way to save 10% or more.  If you’re struggling to save 10% of your income then you may want to consider using David Bach’s tip from his famous book, The Automatic Millionaire..[3]  He recommends setting up automatic withdrawals to your 401(k), Thrift Savings Plan, or IRA to force you to save.

But is 10% of your income enough?  Some certified financial planners say no—10% is not enough.[4]  My son is 17, and has his first job. I’m teaching him to put 20% or more in savings every paycheck.  I actually started this practice when both my kids were young and earning allowance.  I forced them to save a part of their allowance.  The original 10% savings rule came from an assumption that you’d earn inflation-adjusted pay increases throughout your career.  As the work force and income habits change, this is not happening.  Also, the cost of nearly every commodity is increasing faster than most incomes.  When I’m asked if 10% is enough, I give the typical financial answer, “it depends.”

Your personal savings rate should depend on your overarching retirement and life goals.  Saving for retirement without developing retirement goals is like throwing a dart and then drawing the bullseye around it.  To illustrate this, the average 401(k) balance shows that only people currently 40-49 seems to be taking retirement seriously.  The average 401(k) balance for people 60-69 is less than those that are 50-59 as of the second quarter of 2017.[5]  When do you want to retire?  Try using this site to help you plan on when you can retire.  You simply put in your details and it will tell if your current savings rate is sufficient.

Average 401(k) Balance by Age

This aimless path towards saving for retirement seems to be what many people are doing.  Many people are saving aimlessly and hoping they have enough for retirement, or even scarier, hoping that Social Security will provide a sufficient retirement.  People suffering from depression often express that they feel like they are living life “aimlessly.”  To help with this, psychologists often recommend people write their own obituary.[6]  What do you want written in your obituary when you pass away?  These ideas become your goals in life.  Then you simply work backwards and complete the necessary steps to achieve the obituary you wrote.  You can do this exercise to develop your retirement goals.  What would you like your retirement to look like?  Work backwards from there, and it will help you determine your savings rate.

As the Financially Independent Retired Early (FIRE) community grows, many people realize they must have an aggressive personal savings rate—sometimes as high as 50%.  With an aggressive savings rate and keeping expenses to a minimum, they are able to retire early.  What are your retirement goals?  How much do you need to start saving after your living expenses are covered?  For the financial genome, we’ll use 10% as our benchmark, but we need to understand that our retirement goals should determine our savings rate.

Financial Genome Project Chapter 13