As a financial advisor, I’ve tried to answer this question hundreds of times. It seems simple enough, but when you consider unknown variables like life expectancy, future rates of return, and inflation, things can get complicated.
Saving is vital to financial health—probably more so than other financial metrics. Someone who saves more money has greater flexibility, margin, and an easier path to financial independence.
Answering this question shouldn’t be complicated, it’s just too important!
How to find my savings rate
The first step to answering “am I saving enough” is to calculate your savings rate. This is your total annual savings divided by your total (gross) annual income.
For example, someone saving $12,000 per year with a $100,000 gross annual income would have a savings rate of 12%.
Savings rate is a better measure of “savings” because it’s agnostic to how much you make. Just like the handicap system in golf allows two players of different skill levels to fairly compete against each other, the savings rate allows us to fairly measure financial health no matter if you make $30,000 or $300,000.
To calculate a savings rate that is most indicative of financial health, I would recommend only counting savings that won’t be spent. In other words, if you are saving up for a large purchase, I wouldn’t count this in your savings rate. That money is being saved to be spent and won’t move you toward financial independence.
Comparing my savings rate with others
The second step to answering this question is to take your savings rate and compare it with some sort of benchmark or guideline.
As Grant and Daniel discussed on this episode of the Stewardship Podcast, comparing yourself to others isn’t normally a good idea, but there are times when the right kind of comparison is valuable to your finances.
One of the right kinds of comparison is comparing yourself against benchmarks. While benchmarks don’t take your personal situation into account, they are helpful in simplifying the answer to this question.
Generally, I find that people save between 10% and 30% of their income. But it’s most closely correlated by your age.
20 to 35 year-olds
As you might expect, this age group usually has the lowest savings rate. If you are this age, I recommend a 10% minimum savings rate. This gets you in the habit of saving and investing (we call this Stage 1 of the “Wealth Building Journey”).
Most people will start saving in a company 401(k), or they might even open up a Roth IRA.
People in this age group typically have similar traits:
- Lower income—early career usually means income has yet to ramp up.
- Higher debt—this could be student loans or a new mortgage payment.
- Competing priorities—starting a family, buying a house, starting/changing careers.
One fault I see with this age group is only saving up to the match in their 401(k). If your employer has a 6% match, don’t just save 6% and stop. Look for ways to get your savings rate to at least 10%. If you are having trouble saving more, try this trick.
35 to 45 year-olds
At this age, your income should be trending higher. Your savings rate should be growing with your income, too.
If you are this age, I recommend a 15% minimum savings rate.
It’s usually here that people start asking not only “How much should I be saving?” but also “Where should I be saving?” We call this Stage 2 of the “Wealth Building Journey”. People in this stage continue saving in their 401(k) and Roth IRA but like the added flexibility of investing in a non-retirement account.
45 to 65 year-olds
Somewhere in this age range you will have your peak earning years. This is your chance to maximize your savings.
If you are this age, I recommend getting to a 20%+ savings rate!
People in this age move into Stage 3 of the “Wealth Building Journey”. This is about making an impact. You are familiar with investing, you’ve accumulated a nest egg, and you are asking “What’s next?”
It’s also here that we really recommend partnering with an investment advisor.
People in this stage are also paying more in taxes, thinking more about retirement, and have more questions about making their money work for them.
Bringing it all together
Your savings rate is arguably the most important metric of financial health. Savings is directly linked with financial security, peace of mind, and attaining financial independence.
After finding your savings rate, you can benchmark yourself against guidelines depending on your age. As you age and your income rises, your savings should increase as well.
Most people save between 10% and 30% of their income. While it’s generally harder to ramp up savings early in your career due to lower income and higher debt, getting into the habit of saving a minimum of 10% is recommended. At your peak earning years, you should be able to save 20% or more.
