You should begin saving now, even if you can only set aside $100.00 per month. Your goal should be to ramp this up to 10% to 15% of your disposable income, but that is impossible when you are just beginning your career. As we saw in the chart from the OECD above, the savings rate in the United States from 2010 to 2019 ranged from a low of 4.2% of disposable income to a high of 8.1% of disposable income. That gives us average savings rates of:
However, one of the drawbacks of using the average rates is the increasing income inequality in the U.S. Lower income households have a much lower savings rate as a percentage of disposable income than high income households. Therefore, we should look at savings rates for income quintiles or deciles before we decide on a reasonable expectation for a savings rate.
I have my retirement fund at the nonproft mutual fund company TIAA. The TIAA website contained an article by personal finance journalist Paula Pant, who has been featured on MSN Money, Bankrate, Marketplace Money, AARP Bulletin, and more. Her website, “Afford Anything,” draws 30,000 visitors each month. Paula recommends saving 10% to 15% of your disposable income. However, she also recommends the 20/50/30 Rule for personal budgets (Pant, 2020):
- 20% of your disposable income goes to savings
- 50% of your disposable income goes to necessities
- 30% of your disposable income goes to discretionary expenditures, such as entertainment
The 20/50/30 rule seems like an impossible goal. Perhaps more realistically, Vanguard, one of the largest mutual fund companies in the world, advises the following:
- Save at least enough to get the full match offered by your employer retirement plan, if you have one.
- Work your way up to 12%–15% of your pay, including any employer match.
This goal seems more reasonable, although when you are starting your career, it may be very difficult to save anything. The important thing, however, is to begin the habit of saving something every month. As you see your savings grow, you will appreciate the feeling of security and will want to save even more.