How much of my income should I be saving?

There is no single right percentage. The useful answer comes from working backwards: what your life costs, how much you need to sustain it, how many years you have, and therefore how much you need to put away each year. For most people that lands well above the figure they started with, and for a given lifestyle the savings rate is the lever that moves the date of independence most.

Why the savings rate matters twice

Saving more does two things at once. It adds to what you have, and it proves you can live on less, which lowers how much you need. Someone saving 10% of take-home pay lives on 90% of it and has to fund 90% for decades; someone saving 50% lives on half and needs a pot sized for half.

A common way to put a size on the target is the rule that came out of William Bengen’s 1994 study of US market history: a first-year withdrawal of 4%, then raised with inflation, lasted at least 30 years in every period he tested. Four per cent is one twenty-fifth, so the target is roughly 25 times a year’s spending. The rule has real limits, explained in what the 4% rule is; here it is only a yardstick.

How to measure your own rate

1. Take a year’s pay after tax, and add any employer or compulsory contributions made for you (a workplace pension, provident fund or superannuation). They are your saving even though you never see them.
2. Add up what went into savings and investments, including those contributions and extra repayments on debt beyond the minimum.
3. Divide the second by the first. Measure the same way every year, so the trend means something.

Rules of thumb, and where they fit

Fixed percentages are starting points for a budget, not answers for a plan, because they ignore when you want to stop, what you already hold and what you spend. Two habits are better supported than any particular number.

• Save first, automatically. In Madrian and Shea’s study of a US employer, enrolling new staff automatically raised participation in the workplace savings plan sharply, and a large share kept the default contribution rate and fund, though nothing about the plan’s economics had changed. Defaults stick; make your own default a transfer on payday.
• Take any employer match. The SEC calls a matching contribution free money; it is the highest certain return most savers ever see.
• Raise the rate when pay rises, before the increase is absorbed into spending.

Common mistakes

• Ignoring compulsory or employer contributions, which can make a careful saver think they save far less than they do.
• Saving a fixed percentage while spending creeps up, so the target keeps moving away.
• Chasing a high rate by cutting essentials you will restore later. A rate you cannot keep for years does not help.
• Leaving savings in cash for decades, where inflation erodes them. See why starting early matters.

Seeing it in Nivritee

The What you earn card on the Overview shows a Left over line: the share of income that remains after everything you spend and every loan payment. Under What would move this, the Save a little more lever re-runs your projection with a tenth of that surplus saved every month, and says how many years earlier it reaches independence. See what the three money cards tell you and the levers.