The 20% Question: How Much of My Pay Should I Really Save?
When it comes to making financial progress, we can all agree that saving for the future is a critical part of the equation. But how much are you supposed to be socking away exactly ?
This post originally appeared on LearnVest .
According to the
, your monthly
Since these percentages are divisions of your net pay-the after-tax income that you bring home-someone who makes, say, $35,000 a year should set aside at least about $4,800 for financial priorities. Think that sounds like kind of a lot? You aren't alone. That's why we spoke to
LearnVest Planning Services CFP
Tonya Oliver-Boston to find out if we
need to allocate 20% of our income toward financial priorities each year-and how much of that 20% should go into savings
Why Anyone Can (and Should!) Follow the 20% Rule
For many people, putting at least 20% of their net pay toward financial priorities isn't actually all that difficult. In fact, Oliver-Boston finds that the biggest problem clients generally face isn't that they can't manage to allocate the 20% for financial priorities-rather, it's that outsized debt, like student loans and high credit card balances , that eats up most of that 20%, leaving little left over for savings. But as Oliver-Boston cautions: "Even if you have debt in excess of 20% of your net income, you still need to find a way to save!"
Translation: Prioritizing one financial priority
mean that you can ignore the others-be it debt payments, adding to your
, contributing to your
or other savings goals, like accruing enough
So what's the best way to divvy up that 20% across all of your financial priorities? "It depends on the individual situation," says Oliver-Boston. "But emergency savings and payments on high-interest debt tend to fight for first priority."
Need real-life examples? According to Oliver-Boston, if a client has a lot of high-interest debt but also has emergency savings, the client's first priority would most likely be the debt because she has money in place to support her should she find herself in a situation in which her income could no longer cover her living expenses. If a client is cash-strapped, however, putting money into an emergency fund would probably take priority because the client doesn't have the necessary cushion to cover her day-to-day expenses should an emergency
Think You Can't Save Enough? Think Again
In most cases, it's unlikely that you simply don't
the money to put toward your financial priorities
"It's a sticky situation," says Oliver-Boston, "because you can't make a client move. But when it's pointed out to you that the troublesome element of your budget is a fixed percentage, it shouldn't be surprising that you don't feel like you're getting ahead."
If it isn't your fixed expenses that are throwing your budget out of whack, then it's probably your lifestyle choices. This, too, is changeable. Since few things you truly need fall into this category, you should be able to eliminate lifestyle expenses fairly easily. That said, since dinners out tend to add up slower than, say, rent, it might take a while.
"It's almost like
To be fair, Oliver-Boston qualifies, the people who are having trouble saving 20% aren't necessarily making unwise choices when it comes to properly allocating their money. "During the downturn, a lot of people used
But regardless of whether your budget is a little unbalanced or you're recovering from a major financial shock, Oliver-Boston's advice for finding the funds for your financial priorities is the same. "First of all, you need to take a realistic look at your expenses, because turning a blind eye isn't helping anybody," she advises. "And, second of all, you have to be willing to change."
Libby Kane is the associate editor at LearnVest. After graduating from