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10% Rule: Is Saving 10% Enough?7/1/2023


Let's talk about the 10% rule! It's a popular idea 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, regardless of 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 in some states.

On the other hand, 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. So let's talk about whether this rule is a smart idea for you and your finances or if you should consider other options.


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

The 10% rule is not an actual rule per se. 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. It's a common rule of thumb when it comes to savings.

However, simply saving 10% might not be enough, depending on your short-term, mid-term, 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.


Possibilities for saving

The 10 percent rule is focused on saving 10% of your income, pre-tax. So obviously, there will be huge differences in the amount you save based on that.

For instance, if you make $100,000 a year, then you will save $10,000 annually. However, if you make a more typical salary of $50,000 each year, then you will end up saving $5,000.

A method like this may work for you or not, depending on your circumstances and goals.


Why the 10% rule may be worth it for you

While it may not work for every budget, saving in this way can be a great start for many. If you're struggling to see the advantages of the 10 percent rule, consider these ideas.


1. Increase your savings

If you aren't saving at all or not much, using this rule can greatly increase your savings. This simple approach can really improve the rate at which you build up an emergency fund or save for a purchase.

And if you are new to saving, this can be the ideal solution to help you stay on track.


2. Learn to budget and make wise decisions

Since you are saving a percentage of your income, that means you will also learn to be wise with the rest of it.

For example, you'll need to work out how much money you spend on bills and living expenses, how much you can save, and how much you use for discretionary spending.

Using this method and budgeting can help you stay organized and make better financial choices.


3. Prepare for your future

There's never a bad time to prepare for your future and retirement, and the ten percent rule is a smart way to begin.

If you are new to investing or using a 401(k), this rule is a great way to be sure that you are consistently making good choices for your future. You can breathe easy, knowing that you're putting money away for your later years.

And if you have a significant expense coming up in the future, say, 5 years from now, you will be able to save up some cash to help with that. Examples of this might be a new roof for your home or an extravagant vacation.


How much most people save

A study from Zippia discusses the average savings for typical Americans. They found the average American had $4,500 put away in savings. However, a typical household has $41,600 saved, but the median is only $5,300. Americans under 35 had the lowest amount of money put into savings, with the median being $3,240.


For retirement savings, there is a shocking 42% of people ages 18 to 29 who have saved nothing for retirement. Among those that are 60 years old and older, 13% have not saved for their retirement.

Clearly, many people struggle to save. That's why the ten percent rule can be a good idea, especially if you were previously saving nothing.


What the 10% rule actually looks like

Saving 10% of your paycheck (even after taxes) is a great place to start. Especially 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.

However, 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. Emergency savings

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. Others strive to only cover essential expenses.


Example of how long it takes to save an emergency fund

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.

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.

It 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. But there are other ways to save emergency cash, such as increasing your income and making a plan.


2. Retirement preparation

It’s recommended that you begin saving for retirement as early as possible. Let’s assume you already have an emergency fund built.

Now you can transfer your 10% savings directly to a 401k or IRA. Is this amount enough to help you retire?


How to decide how much you need for retirement

It is typically said that you should save somewhere between 10-15% of your income, pre-tax, for retirement.

But each situation is individual, so it's impossible for one rule to be the right solution for everyone. Rather, you should look at your individual expenses, whether or not you'll have a house payment, and what other income you expect to have in retirement to help you decide how much to save.


3. House down payment savings

Now you know the 10% rule may not be 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.

Saving for a down payment is a smart idea, as you can lower your monthly payment and loan rate and save tens of thousands over the lifetime of your mortgage.

Many FHA loans only require a 3.5% down payment.

However, many mortgages require a 20% down payment in order to avoid private mortgage insurance (or PMI).


Real-life example of saving for a home

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, 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 or a home inspection, and other home-buying expenses.


Ultimately, saving 10% just isn’t enough to help you get ahead in your savings journey. That said, it is still absolutely worth saving something, even if it's just 10% (or less).

As you save what you can and build your savings habit, you can focus on getting creative to earn more money and increase your savings rate.


Other ideas for saving money

While this idea of the 10% rule is a smart way to begin, it may not be the right option for everyone. Here are some alternatives.


1. One way to increase your savings is by employing the 50/30/20 rule.

The 50/30/20 rule tells you to use 50% of your paycheck for essentials (rent, groceries, utilities, transportation). Then 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 toward your savings percentage.


What I like about the 50/30/20 rule is that it forces you to analyze where your money is going. Then 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.


2. Alternative percentages to save

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. In turn, it creates a focus to save more.

There are also alternative percentage methods, such as the 60-20-20 rule and the 80/20 rule.


And you can always make up your own percentage method based on your budget. Maybe you want to save 10%, or perhaps 40 or 50%. It's up to you!


3. Save a set amount each month plus any extra income

Rather than use a percentage system like the 10 percent rule, you can make saving really easy by saving a set amount each month. If you want, you can add extra income to this, as well.

For example, suppose you decide to save $500 a month. You do this every month, and one month you make more than your usual paycheck, so you add some extra funds to your savings.

It's a great way to build up your savings in a predictable way and can work especially well for people with steady incomes that rarely change or if you have a lot of extra income.

But the beauty of it is that it can be tailored to your budget. If you want to save $50 a month, do that. If you want to save $1000, that is also possible.

The ten percent rule can be a great place to start your savings goals!


At the end of the day, saving any amount of money is a win. The 10% rule might be the amount you can save 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% to 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 you progress along your savings journey. The key is to just start!



Copyright: Written by Courtney Johnson. May 8, 2023: 10% Rule: Is Saving 10% Enough? | Clever Girl Finance

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