10% Rule: Why Saving 10% Isn’t Enough

10 percent rule

Let's talk about the 10% rule! It’s a popular myth that saving 10% of your income is a smart way to start building a healthy savings account. No matter where you are in your savings journey, trying to save is always important — no matter how much or little that is. However, following the 10% rule and saving just 10% might not be enough for the long term especially given the high cost of retirement.

If you’re just beginning your savings journey or have recently suffered a job loss or demotion, saving even 10% of your income might not be realistic. Not being able to save as much as you’d like is common. The key is to build a plan to help you meet these savings goals over time, so you can stay focused and committed.

What is the 10% rule as it relates to your finances?

The 10% rule is not an actual rule per say. It is simply an idea people leverage where you save 10% of everything you earn towards your different financial goals. For instance, towards your emergency fund, saving for retirement or investing. This is a common rule of thumb when it comes to savings. However, simply saving 10% might not be enough depending on your short term, midterm, and long term goals. Ideally, your savings percentage should be based on how soon you'd like to reach your goal and how much you'd realistically need.

How much typical households save

A CNBC survey recently took a look at how much average American households had in their savings accounts. They found the average household has $8,863 put away in savings. Those between 55 and 64 tended to save more, while individuals and couples under 44 tended to save less. Americans under 35 had the lowest amount of money put into savings. No salary information was provided, but in general, these saving trends indicate that most Americans should be saving more than they currently are.

What the 10% rule actually looks like

Saving 10% of your paycheck (after taxes) is a great place to start if you’re just beginning your savings journey or if you aren’t making enough money to save a higher percentage. For instance, if you take home $2,800 each month (after taxes), following the 10% savings rule allows you to put away $280 a month. After one year, you’d have $3,360 saved.

Using this method to start your savings account is an excellent step, but it’s important to challenge yourself to start putting more money away as you begin to earn more income or decrease your expenses. Why? Let’s look at the three main savings categories below to understand more.

1. Saving for emergencies

It can be hard to start saving if you don’t have a number or savings goal to work towards. It’s generally recommended to have an emergency fund to cover anywhere from 3-6 months’ worth of expenses (rent/mortgage, groceries, utilities, credit card bills, etc). Some people like to put away enough to cover 3-6 months of their current salary, while others strive to only cover essential expenses.

If you were saving 10% though, this could take quite a while to build. Let’s return to the $2,800 a month take-home pay example. Let’s say your essential expenses equal $2,000 per month. In order to put away 3-6 months worth of expenses, you’ll need to save between $6,000 and $12,000. At a savings rate of $3,360 per year, it will take nearly two years to build 3 months worth of expenses and almost four years to build 6 months.

This doesn’t take into account the reason your emergency fund exists — to cover emergencies. You want to be able to pull from this account when your car needs unexpected repairs, you have medical bills to pay, or find yourself having to replace your water heater. In this case, 10% doesn’t get you the security you need in your emergency fund. (Learn more about quick strategies to bulk up your emergency savings).

2. Saving for retirement

It’s recommended that you begin saving for retirement as early as possible. Let’s assume you already have an emergency fund built and now want to transfer your 10% savings directly to a 401k or IRA. Is this amount enough to help you retire?

Putting away 10% of your paycheck for retirement has been a rule floating around for decades. However, this amount no longer is enough to cover most American’s post-retirement expenses, and even worse, most Americans are not even stocking away this amount.

A study conducted by Fidelity notes that most Americans are saving 8.5% of their income. Millennials typically save 7.5%, followed by Gen X at 8.2%, and Boomers at 9.7%. While Fidelity themselves recommends saving 15% of your income, across the board, all age groups seem to be falling short of this number.

3. Saving for a home

Now that you know the 10% rule isn’t enough to cover your emergency fund and retirement expenses, it’s safe to assume you’ll need to put even more away if you want to begin saving for special goals, such as buying a home.

Once your emergency fund is built and you’re enrolled in retirement savings plans, you can switch the percentage going to your emergency fund to goals like buying a home. Saving for a down payment is a smart idea as you can lower your monthly payment, loan rate, and save tens of thousands over the lifetime of your mortgage.

Many FHA loans only require a 3.5% down payment, but many mortgages require a 20% down payment in order to avoid mortgage insurance (PMI). Looking back at the $2,800 take home example, let’s say you’re able to save 10% of your paycheck just for buying a home.

If homes in your area average $210,000, you’ll need to save $7,350 to meet the 3.5% requirement and $42,000 to meet the 20% requirement. It will take you just over two years to save 3.5% and twelve and a half years to save 20% at this rate. Keep in mind this doesn’t include closing costs, agent fees, inspection, and other home-buying expenses.

Ultimately, saving 10% just isn’t enough to help you get ahead in your savings journey.

Using the 50/30/20 Rule increase your savings

One way to increase your savings is by employing the 50/30/20 rule. This rule tells you to use 50% of your paycheck for essentials (rent, groceries, utilities, transportation), 30% for nonessential spending (takeout, entertainment), and 20% for savings and/or debt payments (student loans, credit cards, emergency fund). However, you can adjust your categories to direct more towards your savings percentage.

What I like about the 50/30/20 rules is that it forces you to analyze where your money is going, so you can make better budgeting decisions and potentially save more money. It also allows you to prioritize savings in a way that makes sense for you. For instance, if you pay off your high-interest debt, you’re then able to increase the amount going into your savings account.

Also, by allowing you to spend 30% on nonessentials, you’re also able to cut nonessential spending without feeling like you can’t spend a dime on things you enjoy such as workout classes or date nights. While this method may not line up perfectly, it gives you a good framework to begin budgeting and paying attention to where your money goes and in turn, creating a focus to save more.

How much should you really save?

At the end of the day, only you can answer this question. The 10% rule might be just what you can do; not everyone can save 10% right now and that’s okay! But many people can save more than 10%. If you fall into this category, I’d recommend challenging yourself to save between 20% - 30% across your emergency fund, retirement savings, and general savings accounts. And if you’re unable to save this much, use this range as a savings goal to strive towards as your progress along your savings journey.

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