Save 30 Percent (Or More) Of Your Income With This 3-Step Process

Do you know how much money you save right now? And more importantly – do you know if it’s enough?

Your savings rate is one of the best metrics to use to determine if you’re on the right track to meet your goals. It’s represented by the percentage of your gross income that you put toward long-term goals — things that might include a traditional retirement or the more non-traditional financial freedom.

And if you do hold big hairy audacious financial goals or want to get to financial independence, that savings rate needs to be at least 20% of your gross income… but more realistically? You should aim for 30-40%.

Here’s why that should be your benchmark to meet or beat – along with a 3-step process that will help you set your finances up to achieve it.

Why A 30-40% Savings Rate Works So Well

There’s no universal law of nature that requires you to save a certain percentage of your income. But we develop these rules of thumb based on the goals you want to achieve.

If you start working in your early twenties and plan to work until 70, at which point you’ll retire to a modest life of leisure – then saving 10 to 15% of your income throughout your working years is probably enough to accomplish what you want.

This savings rate, however, is not sufficient for reaching financial freedom in your 40s, 50s, or even 60s. For that, you need to start looking at putting away 20% to long-term investments.

And if you have even more aggressive goals (like wanting to retire extremely early, or retire in your 60s but fund a lavish lifestyle now and in retirement), then you’ll need a more aggressive savings rate to meet them.

That’s where we start talking about those 30-40% numbers. Some experts will even suggest saving more than that; fans of the FIRE movement tend to cheer for saving 60-70% of your income.

More reading: The Forbes Guide To Fire

You can do that, of course – but there are many reasons I tend to advocate for the 30-40% range instead.

This Savings Rate Allows For More Balance Between Today And Tomorrow

For one, this is still a significant chunk of your gross income. Remember that once you account for 30-40% to long-term savings, you still need to pay taxes, fixed living expenses, and have money for all the other spending you need (or want) to do.

And you know what? The spending you want to do right now does matter. You don’t have to put your life on hold until you have “enough” money or go to extremes to meet your goals.

While many FIRE enthusiasts are die-hard frugality fans, I prefer helping my clients balance enjoying their life now with planning responsibly for tomorrow.

Saving this amount of money usually allows people to get to a point where work becomes optional by their 50s or 60s, depending on their lifestyle and expenses they want to maintain.

While that’s not as exciting as headlines that proclaim “employee #3 of tech startup retires at 30 after living exclusively off company cafeteria leftovers” or whatever the latest trending storyline is… it’s pretty realistic and appealing to most people who don’t loathe their jobs to the extreme that they want to quit working forever before 35.

Most of the people I work with actually enjoy their careers and would like to stay engaged with their work until mid-life.

At that point, they’re most interested in having the choice to continue or not on their terms; a 30-40% savings rate allows them to meet this future goal without sacrificing what they want to enjoy in the present.

The 3-Step Process To Use to Start Saving 30% (or More) Of Your Income

So if you’re on board with the idea of saving 30-40% of your income… how do you do it?

It helps to get a sense of where you’re starting from. What’s your income today and how much are you currently saving? Remember that money that you count toward your savings rate is not just cash you set aside to spend in a year or two.

Yes, you do need to save up for a trip you want to take, or a house you want to buy in a few years. But you can’t count that toward your “money saved per year” total, because you won’t keep that cash in savings or investments for the long-term.

Money you save to spend within the next 1 to 5 years is important – but it’s more like glorified spending rather than true saving for goals like financial independence.

Savings and investments that count toward your savings rate include funds that you will keep invested for the next 10, 20, even 30 years. This probably includes things like:

  • Your retirement plans (either from your employer, like a 401(k), or ones you open on your own, like IRAs)
  • Health savings accounts
  • Non-retirement accounts, like individual or joint brokerages

So, for example, if you earn $100,000 and you save $10,000 annually to your 401(k), put $1,000 into your HSA every year, and max out your Roth IRA at $6,000, then your total savings is $17,000 – or 17% of your income.

Once you determine your current savings rate, you can begin the 3-step process to increase it up to 30-40%.

Step 1: Set Your Savings Rate Target

Obviously, we’ve been talking a lot about the 30-40% range and that’s where I suggest you start. Regardless of the specific amount you choose, keep it in percent format.

This is a good way to guard against lifestyle creep. If your income goes up and your goal is to save a percentage of what you earn, then your savings go up automatically.

Similarly, if your income goes down, then your savings goal will automatically stay in sync with that (and not leave you reaching for an over-sized goal that will stress you out).

Step 2: Design Your Savings System

When it comes to meeting my own savings rate goals, I rely heavily on a system. My wife and I automate contributions to our accounts as much as possible.

Here’s how you can do the same:

1. Give your money a job

Money doesn’t just hang around in our bank account. As soon as we have “extra” cash, that money gets moved to the appropriate location because it has a purpose – it’s helping us get to long-term financial freedom, for example, or to access short- or mid-term investment opportunities.

“Extra” cash is anything over and beyond what you need for emergency savings, monthly expenses, and short-term goals.

2. Know your savings vehicles

Once you know the purpose for your money, it’s much easier to match it to the right account that aligns with that purpose.

Appropriate vehicles might include retirement accounts (through work and things you can open on your own like IRAs or HSAs) and brokerage accounts.

Within those accounts, you can adjust the portfolio of invested funds to be more aggressive (for long-term investments) or much more conservative (for shorter-term investments).

3. Divvy up your cash

Once you determine your savings rate, determine how many dollars per month need to go to which accounts you’re going to use to help you meet your goals.

Set up automated contributions so you remove the need to make that decision to save each month; it just happens.

The more you can take yourself out of the process – meaning, the less decisions you make about where money goes, how much you transfer, and when you make those contributions – the easier it will be to stick to your plan over time.

You’ll have to revisit this piece of the plan quarterly or annually to ensure those dollar amounts add up to a total amount that corresponds to your set savings rate target.

Step 3: Focus On What You Can Control With Your Cash Flow

This means looking at what you can influence with your income, and what you can control with your expenses.

For us, managing expenses really comes down to spending on what we value and cutting the rest. This requires you to:

  • Get very clear on what actually matters to you. This is a process, and it’s something we still work on.
  • Be confident in what you say yes to, and what you say no to – and you will have to say no. You will have to turn down things you want to do in the moment to prioritize what is most important to you over the long term.
  • Plan ahead as much as possible. It’s amazing what good planning can do to help you save money. As one example, we spend a lot of time planning out meals and what to cook so that we almost always have the option (and, more importantly, the desire) to eat at home instead of eating out. But you can also plan ahead so you can shop around sales and get good deals. Plan ahead, so you have time to research options and not get stuck making a rushed, pressured decision.
  • Pay attention to the little stuff… but know you have to get the big stuff right even it only comes up every once in a while. Don’t overspend on things like your housing, cars, or let lifestyle creep get out of control over time.

Controlling your cash flow also means staying engaged in the financial conversation. My wife and I are constantly asking questions about our values, our spending, our goals, and more.

We try to be mindful and aware, both when we sit down for long-term planning and when we’re in the moment.

We ask questions like, “how excited do you feel about this thing? Are you going to feel like you missed out if you don’t have this experience or go to this event? Is this truly something we feel good about spending money on or does it not really align with our values?”

This process allows us to really tune in to what we really want and what we get the most value out of. It helps us avoid getting caught up in chasing experiences that aren’t really as fulfilling as we hoped they’d be.

And of course, we keep a budget – but it’s everything else listed above that helps us maintain and stick to our set budget over time.

On the income side of things, we also look at what we feel we can control. We make decisions that we believe will boost our total household income.

These days, that’s usually around reinvesting in the business we own and work within so we can add value, enhance the service provided, and therefore attract more clients who want to be part of what we’re doing.

But in the past, it was the initial decision to pursue self-employment in the first place. And my wife still makes that choice in little ways all the time – even though she works full-time within in the business, she also regularly seeks out additional freelance gigs.

She loves her work, and it brings in extra money that can be added to the amount we save.

Saving 30% Or More Of Your Income Is Never Easy – But It Can Be Possible

Ultimately, saving big chunks of your income – whether that’s 20% or over 40 – is never easy.

It takes commitment and work — not just to start the process or set up the system, but to consistently stick to the strategy and manage this whole thing over time.

It’s not easy, but it is possible to increase your savings rate. These 3 steps — setting your target, developing your system, and focusing on what you can control in your cash flow — are a great place to begin.

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