How Much of Your Income Should You Save Every Month?

For many, savings rates simply aren’t a priority.

While examining my handy dashboard excel budget last week, I focused my attention on our savings rate. Hard to believe, but we had somehow achieved a savings rate of 83%.

That’s 83% of our take-home pay going straight to savings plans and debt payments vs. expenses.

How much of your income should you save every month? Not 83%, but there is a good percentage you should try to achieve.

How to Calculate Your Income Savings Rate

Start with all of the take-home money you make each month. Lump it all together. This is your denominator. We’ll assume a post-tax take-home amount of $8,000 per month (an annual post-tax income of $96,000 for this hypothetical household, the Smiths).

Include your paycheck after taxes. Then, add in any income you make from side hustles (rental properties, blogging, dog-walking business, etc.) Remember, side gigs are highly recommended, so long as they don’t distract you from the important stuff like being here now for family and friends.

We’ll figure Mrs. Smith runs a sweet Airbnb using the renovated space in the loft over their garage. This modern and well-appointed rental unit generates $500 a month after the mortgage and expenses (supplies, maintenance, and fees) are taken into account.

Be sure next to factor in mortgage principal. This is equity the Smith’s gain back from the bank month over month, coupled with increased market value. Adding principal to our savings rate calculation is just as important as take-home pay. For the sake of simplicity, let’s assume $300 of principal is gained each month at this stage of their mortgage.

The final step in figuring out our total monthly savings is to add up all of the money you’re socking away in 401k, IRA, HSA, and 529 accounts. Let’s assume the Smiths contribute a decent amount to their respective 401ks (enough to meet the company match plus a bit more). Let’s also assume the primary health-insuring spouse (Mr. Smith) is maxing out his HSA.

This adds a healthy $2,000 to the Smith’s monthly savings tally.

Putting It All Together

The denominator now stands at $10,800 ($8,000 + $500 + $300 + $2,000). Pretty simple so far, right? Just imagine if you’ve got four, five, or twelve rental properties kicking back principle to you each month, in addition to rental income. SCORE.

Next, we need to figure out the numerator. Simply add up all of your monthly household expenses. These include line items such as mortgage payments, childcare, groceries, utilities, car payments (gasp!), insurance, travel, home maintenance, and so on. If you don’t have an expense tracking system, this is the time to jump on THAT.

A typical family of four could easily burn through $5,000 (or more) per month on common expenses, depending on circumstances. In this example, I assume $500 in monthly childcare for after-school programs. We should note that from birth to Kindergarten, daycare and nanny costs can easily soar to $2,000 or more per month, depending on how many kids you have and the supply and demand for childcare where you live.

The savings rate equation is all set up now. Here’s what it looks like:

($10,800 – $5,000) / $10,800 = .537, or, a savings rate of 54%. Not. Too. Shabby.

If our imaginary family stays consistent with its savings habits, they could look forward to retirement around age 40-45. This assumes a working career starting at age 22 for both earners. The following chart has made the rounds in the FIRE community. 

How Can I Save More of My Income?

Absorb the chart above for a minute. Get your “holy sh*ts!” out of the way if you’re new to this “mega-savings” concept. If you’ve just landed a job after college and you’re already feeling burned out, nothing motivates like hard-core, math-driven early retirement schemes. The same can be said for those of us who’ve been stuck in the cubicle for over two decades…

Our hypothetical scenario using the Smiths is a pretty aggressive plan. How on Earth could they possibly squeeze another nickel into savings, much less achieve an 83% savings rate? Here’s the thing: The ability to retire early is not the same as committing to retiring early.

It’s an important distinction. Nothing builds more confidence in your day job than having the financial wherewithal to lose your job at any time without fear of losing a paycheck. This confidence can be channeled into strengthening your career and your control over your working life. That equates to raises, promotions, and higher savings rates.

This concept is no different from rental properties. Landlords get better over time, even as the number of houses he or she manages increases. Confidence is gained as the newbie landlord fixes the first leaking sink. Confidence is gained after learning how to attract and keep good tenants.

Confidence (and healthy EQ) helps you on the supply side of the equation. Your priority should not be to go live in a tent and take a wheelbarrow to work. No. Your priority is to increase your denominator. Get paid more at your day job and ramp up those side hustles.

I’ll concede that SEVERAL expenses will make your savings rate look like a turd. How much of your income you should save? If you’re not already socking away at least 25% of your take-home pay, and you’re capable of more, then the following must be examined.

1. Is your house too big for the job it needs to do? Are you caught up in HGTV fantasy land, believing that only a house finished by the Poverty Brothers or Chip and Joanna Gaines is a house worth living in?
2. Are you driving around town in a Tesla Model S, Model 3, or a Ford F150? Worse yet, a BMW? If your vanity is worth more than your time and sanity, then, by all means, go buy a new car so you can sit in rush hour traffic in style.
3. Do you put your kids into private schools because you don’t trust their ability to learn from the public school system your McMansion property taxes are funding? The statistics show zero correlation between private education and the public when it comes to long-term success and happiness. But you knew that already since research into private schools means you do your homework too…
4. Do you justify excessive dining out with the convenience and time savings it offers? Eat up, my friend. Because this is the surefire way to burn through money while justifying a go-go-go stress-inducing lifestyle.
5. How about your cell phone plan, car and auto insurance rates, and cable costs? There are countless options to reduce all of these expenses and more. If it matters to you…

But that’s all there is to it. You bust your butt to get paid more during your working years while optimizing your passive income options outside of work. Couple that with a ruthless focus on expense minimization, and you’ve got this concept nailed.

We achieved our 83% savings rate over several years. Before 2014, we were clocking in at maybe 20%. Since taking control of our expenses while growing our careers and businesses, we’ve seen our annual savings rate grow to 50%, 60%, 70%, and now 80% plus.

How Much Should You Save Per Month?

This question can dog you if you get stuck on total dollars. The focus instead needs to be on your savings RATE. If you make $30,000 a year as I did for a few years after college, saving 50% of a low income would be difficult. But if you’re single and share rent with a roommate in a basic apartment, 25-35% is achievable.

I hit 15% in a good year with 8% going to a 401K and the rest to paying off student loans. Face it though, if you continue to work hard and learn from mistakes, better jobs, and higher pay will follow. If you’re fortunate to approach a six-figure income, then saving 50% of take-home pay is entirely within reason.

Double that with a power couple (kids or not) and you start to see how an 80% savings rate is a realistic target. And for the doubters, please recognize that in our case, it took a couple of decades of cubicle life to get HERE.

It also took some business savvy with growth in my wife’s practice and growth in our real estate business. We certainly aren’t relying on blog income (what income??) for any of this…

The bottom line: Save as much as you can regardless of income, but while you save, invest in yourself, and your DENOMINATOR. There are plenty of examples of how a high savings rate can be achieved on incomes under six figures.

What About When You’re Broke?

Let’s face it. Many Americans make a good paycheck but live a broke lifestyle. Jetskis and annual visits to Disneyland take a toll, but in fairness, so do ailing or special-needs loved ones.

First thing’s first. Control what you can control. If you have two car payments, downsize to one car and start using a bicycle or walking. You might have to move closer to a job or a parent who can help with childcare.

You might have to take drastic steps like ditching cable TV, or, cutting your cell service down to a bare-bones data plan. You might have to forego taking an airplane to a resort for vacation and take a road trip instead. Dining out may have to take a back seat to this idea: preparing your meals!

When you’re faced with a mountain of debt, there isn’t much room for savings. Still, if you’re fortunate enough to have an employer-matching 401k, save at least up to the match to ensure you get those free matching dollars.

Oh yes, and please cut up those high-interest credit cards. Replace your shopping habit with a zero-interest learning habit. Once you get those debts paid off and you’ve regained control of your finances, an occasional shopping trip is a healthy, normal activity.

In Conclusion

How much of your income you should save every month depends on several factors, most of which are in your control. Even the most disciplined savers, learners, and achievers require time for their savings rates to grow.

Some advice: Remember to have FUN while taking on this “project”. Ramping your savings rate can be an all-consuming marathon. It’s super easy to get wrapped up in the idea of early retirement while letting life slip by.

Don’t make that regretful mistake. Just remember to prioritize relationships over Escalades and farmhouse sinks, and you’ll be just fine.