Tell me about the 10% rule! The general consensus is that saving 10% of your income is a smart way to build a healthy savings account.
No matter where you are on your savings journey, trying to save is always important. It doesn’t matter more or less.
However, just following the 10% rule and saving 10% may not be enough in the long run. High retirement benefits in some states.
On the other hand, if you’re just beginning your savings journey, or have recently been unemployed or demoted, saving even 10% of your income may not be realistic. It’s not uncommon to not be able to save as much as you would like.
So let’s talk about whether this rule is a smart idea for you and your finances, or whether you should consider other options.
What is the 10% rule related to your finances?
The 10% rule itself is not a real rule. It’s a simple idea people utilize to save his 10% of everything he earns towards various financial goals.
For example, emergency funds, retirement savings, and investments. It’s a general rule of thumb when it comes to savings.
However, depending on your short-, medium-, or long-term goals, simply saving 10% may not be enough. Ideally, your savings percentage should be based on how quickly you want to reach your goals and how much you realistically need.
The 10% rule focuses on saving 10% of your pre-tax income. So it is clear that there is a big difference in the amount of savings based on that.
For example, if your annual income is 10 million yen, your annual income is 1 million yen. However, if the more common annual income is $50,000 for him, in the end he will save $5,000.
Such methods may or may not work for you, depending on your situation and goals.
Why the 10% Rule Is Worth It
It may not work for all budgets, but saving in this way can be a great start for many.If you’re struggling to understand the benefits of the 10% rule , consider the following ideas:
increase your savings
If you don’t save at all or don’t save much, this rule can greatly increase your savings. This simple approach greatly increases the speed at which you build up your emergency funds or save for purchases.
And if you’re new to saving, this is the ideal solution to help you stay on track.
Learn how to budget and make smart decisions
Since you’re saving a portion of your income, you’ll also learn to spend the rest wisely.
For example, you need to calculate how much money you spend on bills and living expenses, how much you can save, and how much you spend on discretionary spending.
With this method and budgeting, you can stay organized and make better financial choices.
prepare for the future
There’s never a bad time to prepare for the future or for retirement. The 10% rule is a smart way to start.
If you’re new to investing or using a 401(k), this rule is a great way to ensure you’re consistently making the right choices for the future. You can breathe easy knowing you’re putting money into it for later years.
Also, if you have a large expense in the future, say five years from now, you can save some cash for that expense. An example of this might be a new roof on your home or a luxury vacation.
how much do most people save
Zippia’s Thoughts Describe the average savings of a typical American. They found that the average American has $4,500 of her savings.
However, while the average household has $41,600 in savings, the median is only $5,300.
Americans under the age of 35 had the lowest savings, with a median of $3,240.
When it comes to retirement savings, the shocking result is that 42% of people between the ages of 18 and 29 are not saving at all for retirement. 13% of people over the age of 60 are not saving for retirement.
Clearly, many people struggle to save money. So the 10% rule can be a good idea, especially if you haven’t saved anything before.
The 10% rule in action
Saving 10% of your salary (even after tax) is a great place to start. Especially if you’re just starting your savings journey or aren’t making enough money to save at a higher rate.
For example, if you bring home $2,800 (after tax) each month, following the 10% savings rule will allow you to store $280 per month. After one year, you will save $3,360.
Starting a savings account using this method is a great step.
However, it’s important to challenge yourself to start saving more money as your income increases or your spending decreases.
why? To understand the details, let’s take a look at the three main savings categories below.
1. Emergency savings
Without a numerical or savings target, it can be difficult to start saving. In general, it’s a good idea to have an emergency fund to cover 3-6 months’ worth of expenses (rent/mortgage, groceries, utilities, credit card bills, etc.).
Some people want to save enough to cover 3-6 months of their current salary. Some try to cover only essential expenses.
Examples of how long it takes to save an emergency fund
However, with a 10% savings, this could take quite a while to build. Let’s go back to the $2,800 monthly take home example.
At a savings rate of $3,360 per year, it takes about two years to build up three months’ worth of spending and about four years to build up six months’ worth of expenses.
It does not consider why emergency funds exist: to cover emergencies. We want to be able to withdraw from this account if our car needs an unexpected repair, we need to pay for medical bills, or we need to replace our water heater.
In this case, 10% doesn’t give you the security you need for your emergency fund. But there are other ways to save emergency cash, such as increasing your income and planning.
2. Preparing for retirement
It is advisable to start saving for retirement early. Let’s assume you already have an emergency fund built.
You can now send your 10% savings directly to your 401k or IRA. Is this amount enough for you to retire?
How to determine how much money you will need in retirement
It is said that it should be stored somewhere in between. 10-15% of pre-tax incomefor retirement.
But each situation is unique, so one rule cannot be the right solution for everyone. Instead, look at your individual expenses, such as whether you have a home payment or what you expect to earn in retirement, to help you decide how much to save.
3. Housing down payment savings
Now you know that the 10% rule may not be enough to cover your emergency and retirement funds. If you want to start saving for a special purpose, such as buying a house, it’s safe to assume you’ll need to save even more.
Saving your down payment is a smart idea as it reduces your monthly payments and loan interest rates and can save you tens of thousands of dollars over the life of your mortgage.
However, many mortgages require a 20% down payment to avoid. Private Mortgage Insurance (or PMI).
A real-life example of savings for housing
Going back to our $2,800 take home example, let’s say you can save 10% of your salary just to buy a house.
If the average home price in your area is $210,000, it would take just over two years to save 3.5% at this rate, and 12.5 years to save 20%.This includes closing costs and home inspectionand other home purchase costs.
Ultimately, saving just 10% isn’t enough to move you forward on your savings journey. That said, even just 10% (or less) is definitely worth the savings.
Save as much as you can and develop a habit of saving so you can focus on getting creative to make more money and increase your savings rate.
Other ideas for saving money
This 10% rule mentality is a smart way to start, but it may not be the right choice for everyone. Here are some alternatives.
Try using percentages like the 50/30/20 rule
One way to increase your savings is to adopt the 50/30/20 rule.
The 50/30/20 rule says to spend 50% of your salary on essentials (rent, groceries, utilities, transportation). Then, allocate 30% for unnecessary spending (takeout, entertainment) and 20% for savings and debt payments (student loans, credit cards, emergency funds).
However, you can adjust the categories to further increase your savings.
What I love about the 50/30/20 rule is that you have to analyze where your money is going. That way, you can make better budget decisions and potentially save more money.
You can also prioritize your savings in ways that make sense to you.
For example, paying off high-interest debt can help you put more money into your savings account.
You can also cut back on unnecessary spending without feeling like you can’t spend a dime on what you love, like a workout class or date night, by allowing 30% to be spent on things you don’t need. increase.
alternate percentage to save
This method may not be an exact match, but it provides a great framework for starting budgeting and paying attention to where your money is going. In turn it creates a focus to store more.
There are also alternative percentage methods, such as the 60-20-20 rule and the 80/20 rule.
You can also always create your own percentage method based on your budget. You may want to save 10%, or 40% or 50%. it’s up to you!
Instead of using a percentage system like the 10% rule, you can make saving a lot easier by saving a fixed amount each month. Additional income can also be added to this if desired.
For example, let’s say you save $500 a month. If you do this every month, you’ll earn more than your regular paycheck some months, so add some money to your savings.
This is a great way to build up your savings in a predictable way, especially for those who rarely have a steady income or have a lot of extra income.
But the best part is that you can customize it to fit your budget. If you want to save $50 each month, do it. If you want to save $1000, you can do that too.
The 10% Rule is a great place to start your savings goal.
After all, saving any amount of money is a win. The 10% rule might save you money right now, but that’s okay. But many say he saves more than 10%.
If you fall into this category, we recommend trying to save between 20% and 30% in your emergency fund, retirement savings, and general savings account combined.
And if you can’t save this much, use this range as your savings goal to get you on your savings journey.
The key is just to get started! Check out our tips on how to quickly save small sums like $300. And step up by learning how to save $5,000 fast!