In today’s post I’m going to break down why it is important to have a high savings rate early on in your career. First off, you start your career practicing a good habit. If you deposit money into your savings or retirement account first thing when getting a paycheck, you will adapt to the new budget for the month. And if the money isn’t there for you to visualize in your everyday banking account, you are far less likely to spend it. Furthermore, as we discussed in the last post, each month you contribute results in one more month where compound interest works in your favor. Go you!
So, what is a realistic savings goal you should be putting away each month? Ideally, a savings rate of 20% of your after-tax income. The breakdown of this would be around 15% toward retirement, and 5% toward other savings goals e.g. adding to an emergency fund, future vacations, car repairs etc. In actuality, this number is variable with some articles mentioning an even higher savings rate. Really it depends on the age at which you want to retire.
Now 20% sounds like a lot, I know, especially if you haven’t been saving much at all each month. If you are just now starting to receive a paycheck, like us new residents, try saving 20% of your paycheck and see how it goes! Put it toward your emergency fund in your new high yield savings account! You technically were starting from no money, so really you should be able to adapt pretty easily. For someone who hasn’t saved much before, maybe try the method I describe below.
So how do I calculate my savings rate?
Step 1: Calculate your after- tax income (easiest way is to do this monthly and just look at the bank deposits from your employer from the last month).
Step 2: Multiply your monthly after-tax income by 0.10 to see what your 10 percent savings rate would be. Then do this again for 20% (i.e. multiply by 0.20).
Step 3: Ideally, the goal would be to save 20%. If you have never saved before, you could start at 10% and then each month increase your savings rate by 2% until you either get to 20% or it starts to hurt (e.g. 12% rate, 14% rate, 16%, etc).
Note: If the savings rate is hurting, that means you are saving enough. Ignore the discomfort and keep at it. A couple of months in you will have adapted your spending habits so that you can save this amount. Humans are adaptable and so are our spending habits!
What do you guys think? Is 20% savings rate too high, too low, or just right? Did you start saving from your first paycheck or is this something you’re planning to work on? Any questions? Comment below! Links for more information and further reading linked below!
https://www.moneyunder30.com/percentage-of-income-should-you-save-every-month
https://www.bankrate.com/banking/savings/how-much-do-you-need-in-savings-retirement-emergency-fund/
Couple of Surgeons 