Do you ever wonder how much of your income you should be saving? Having recently listened to a Vanguard podcast on “Can thrift make a comeback” and revisiting the classic “The Millionaire Next Door” it occurred to me that many people don’t know how much to save. This is very apparent when we start to look at the Personal Savings Rate in the US.
Prior to the recession, as the market was starting to rise, in 2005 the savings rate actually was negative at one point. This was pretty bad according to the MSNBC.com article U.S. Savings Rate Hits Lowest Level Since 1933. It isn’t until recently that the savings rate has started to rise. Now some ecomonist are saying that the recession recovery might take longer because we are saving too much money! This is odd because the savings rate is only about 5%, which isn’t even close to the amount Thomas J. Stanley and William Danko of The Millionaire Next Door say most affluent households save.
Dr. Stanley says that most millionaires save 15 % to 20% of their income. How do they do it? They play great defense. To put it another way, they are frugal. It all boils down to living below your means. In order to live below your means, you might need to know what your means is to start. That is as simple as grabbing your last tax return. Look at line 22 or total income, and multiply that number by 0.2% or 0.15%. That is how much you should be savings. If you total income is $100,000, you should be savings $15,000 to $20,000.
Rich Feight is a Fee-Only Certified Financial Planner and founder of IAM Financial, LLC in Michigan. He is also the author of Thinking Beyond Numbers, the financial planning and investment blog changing the way the world thinks about money. You can learn more about Rich at IAM Financial, LLC.