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Saving Using The 10% Rule: Your Future Self Will Thank You

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“What gets measured, gets managed”

Creating a financially secure future may appear challenging but the first step is to learn where you are now and where you want to be. This is not as easy as it sounds since it forces you to question your decisions be it personal, financial, and even marital. Most of us are not futurists and as much as we are amazing at predicting outcomes, very few of us take an orthogonal approach to understanding all the possibilities. And even fewer take the necessary action. 

We can agree that we must always plan our financial future in the NOW. The 10% rule, popularized by retirement specialists and financial planners, says you should save 10% of your salary for a comfortable retirement.

The 10% rule is not a hard rule by any means but works for most of us in the middle of the bell curve. It gives you an idea of how much of your gross income should be set aside for retirement. It gives you a starting point if you don’t know how much to save, but it’s not a one-size-fits-all approach.

Table Of Contents:

What Is The 10% Rule?

The 10% savings rule is a personal commitment to your future self that can be relaxed or tightened. Rather than being an actual rule, the 10 percent savings makes you more inclined towards making this decision. It sets oneself up for success in many ways – from alternative investing options into retirement accounts or establishing emergency funds at home with some leftover after paying off the debt entirely.

Saving 10% of your gross income is a higher benchmark than most people in the United States. The personal savings rate has generally been in the single digits since the turn of the century – and that estimate is based only on a percentage of disposable income, not gross income. To put it another way, average earners in the US typically save less than 10% of their disposable income, which is the money left over after taxes and required expenditures have been paid.

Insights Of The Rule

Saving requires you to restrain yourself from spending your earnings impulsively or thoughtlessly and set an amount aside for a better and financially stronger future. So, it is often more about self-discipline. You can motivate yourself to save by calculating the amount you would have kept in, say, five years or maybe ten years or more. Once you realize how these little deposits can sum up to something way better in the future, the quicker you start saving, the more significant impact you will be making in planning.

For example, say you started to save at 25 by following the 10% savings rule. And let’s say you invested about $200 every month in a retirement account, earning a modest 5% interest. Your account balance in 40 years (i.e., at the age of 65) would be $305,204.03, including $96,000 worth of contributions and $209,204.03 in interest earnings. 

If you started at the age of 30, you would have saved only $267,053.53 at 65.  To put it in simple words, the gap of five years of saving from the age of 25 – 30 will cost you only $12,000 in contributions but earn nearly $67,000 in interest.

How To Calculate Your Savings Using This Rule

After you’ve made up your mind and a promise to your future self to save, figuring out how much to save is undoubtedly the next step. Calculating how much to save under the 10% rule is as simple as it gets. It’s even easier if you have a fixed salary. Your regular paychecks will all be the same in that instance, so you’ll only have to do the math once.

Your gross pay may change from payday to paycheck if you are paid hourly. In either case, divide your gross earnings by 10 or multiplying by 0.10 (the amount before taxes or other deductions are deducted). For example, if your biweekly salary is $1,450 in gross earnings, you would set aside $145 for savings.

10% Saving Rule = Gross Earnings/10

Where Can You Save

It’s always a good idea to deposit some savings towards an emergency fund if you are starting from scratch. You could save at a place where the money is easily accessible if any unexpected expenses arise. Here, liquidy matters so a basic interest-bearing savings account is the safest and good option.

If you are saving for a more future-oriented expense like a house or your dream car or maybe your wedding, which might take place in several months or even years down the road, or even taking a sabbatical, Certificates of Deposit (CDs) is a decent option. You should prefer the ones with the highest rate of Annual Percentage Yield (APY) for a particular term. Also, as they’re less accessible than another form of investment like the savings account and typically earn more interest, they’re a better option for long-term savings. 

Personally, I don’t use CDs and always invest my savings in above-market return investments. Details about my investments are beyond the scope of this article, but you can always contact us and we will be happy to share what works for us. 

Another option for funding your retirement is to include your employer’s 401(k) accounts if they match up to a certain percentage of your income to your gross income while calculating how much to save. For example, if your earnings are $30,000 annually and your employer matches up to 3%, which becomes an additional $900 you are receiving from your employer every year, making your gross income for the 10% savings rule $30,900.

Tax-advantaged funds, such as 401(k)s and IRAs, have rigorous and complicated regulations for withdrawals made before a certain age, making them ineffective for early retirement. You may choose to maintain part of it outside the system in a regular savings or (when it grows large enough) brokerage account in addition to saving extra. In short, you don’t have to choose between the temptation of spending versus the need for saving.

When Might The Rule Not Work

It’s more difficult to save when you make less money, especially if you’re trying to save 10% of your gross pay. Rent, groceries, and student loan payments can add up quickly for someone just starting, making the 10% guideline tough to achieve. In that situation, save as much as you can to pay off debt and increase wages to the point where a 10% savings rate is more feasible.

If you have a lot of high-interest debt, even someone with high enough wages to save 10% would want to reassess their strategy. It’s usually a wonderful idea to set aside some money to begin compounding interest as soon as possible. Still, if you have a lot of credit card debt with interest rates around 20%, you might want to devote part of the money you’re saving to paying off that debt as quickly as possible.

The Takeaway

The 10% savings rule is as simple as dividing your gross revenue by ten. You can use the money saved to fund a retirement account, create an emergency fund, or lend a home down payment.

If your employer offers a 401(k) match, take advantage of it; otherwise, you’ll be losing out on “free” retirement cash.

If you have a low income or a lot of debt, adjust your savings accordingly, but don’t give up completely.



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