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.
Megan is a 30-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.
I think the 10% includes retirement savings. They say you should work on an emergency fund first and then work on retirement. Do I follow this, no. Currently I save 6% of my income and my employer matches 1/2 of that.
Good luck with your goals, it’s difficult to get to where we want to be, but I know the end will be worth it.
I’m not entirely sure. I think if you already have an emergency fund, saving 10% for other goals is a good way to make sure you aren’t spending more than you earn.
I don’t know if that rule of thumb also includes retirement.
I guess the best thing to do is look at your personal situation and decide how much to save.
What else would you like to have in your life? A car? A home of your own? More education? A trip overseas? A wedding? Children someday?
These are all aspects of life that you might want to save 10% of your income for.
Just some suggestions! 😉
Meadow