I have a small financial confession to make. I have no idea what it means to save 10% of your income.
Ok, let me clarify. I know what 10% of my income is. And I know that financial advisors seem to say that you should pay yourself first and save 10% of your income. My question is this: What is that 10% for?
Does that 10% include the 5% I put into retirement savings? Or should I be saving 10% in addition to that?
Let’s assume that it doesn’t include the retirement amount. Let’s also assume I have an emergency fund big enough to cover expenses for an entire year. So every month I am putting away 10% of my income for… what? Can I use that money towards buying a house? Is it for use before the emergency fund gets touched? Can I take money from it to pay for a vacation? Is it also for retirement purposes? What is this 10% for?
Maybe this is a dumb question. It’s one of the simplest rules of personal finance. I understand that saving is good. But what I don’t get is if this rule allows me to ever touch that money, and if so, when and why.