Is there a certain or good amount/percentage that you should try to up your yearly savings to plan for future economic changes?

Asked by Daniel Dohlstrom

1 Answer

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Answered by Charlie Donaldson, MBA in Newark, DE
Great question Daniel!

I counsel my clients that they should follow a 10/10/10 rule. Thus regardless of your income amount, you should put 10% of your income into each of 3 categories.

10% - short term: car breaks down, refrigerator, etc. - money should be accessible and guaranteed. - savings, money market accounts or cash value life insurance.
10% - mid term: Kids college, roof repair, car, etc. - money should be safe (minimal if any risk) and accessible when needed - CD's, money market accounts, cash value life insurance, or possibly a low risk mutual fund or ETF.
10% - long term: retirement - 401k, IRA, Annuities, or cash value life insurance.

Now, to get to this point you should increase your savings rate by 1 or 2 % each year. However, you should also account for Parkinson's Law. "Expenses will always increase to equal the available income." Thus, if you get a raise then you should add 100% of that raise to savings. If you pay off a debt, you should add the amount of that payment to your savings. This, in addition to increasing your savings rate each year.

By following this plan, you will get to a point where you will never need a bank or credit card company again. You will have 2+ years of short term savings that you can borrow from in an emergency.

I know this is different from the norm, but take a look at the economy and what is happening with retirees today. Do you want to be normal or do you want to be extraordinary?

I hope this helps!

| 08.21.15 @ 19:39
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 20:06
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