Saving 10% Salary – Is It Really Enough?

saving 10% of your salary

When I started working, one advice that was given to me without asking for (and I am sure its quite common) – was to save atleast some fixed percentage of my salary every month.

Save 10 percent of your salary every month.

That is exactly what was told to me by a senior colleague. Another one had asked me to try saving more than that 10% of salary.

Save 10% of Salary

And this is a sort of standard advice that is given to a lot of people by their seniors (in office, family, etc.). Its like a comforting thumb rule. And it is somehow unquestionably assumed, that if you adhere to this thumb rule, all will be good.

But saving 10% percent a month from your salary – Is that really enough?

If not, then how much money to save each month from your salary in India?

Lets try to critically assess this common advice being doled out by almost everyone to almost everyone. 🙂

So…

 

What is the 10% Savings Rule?

Its simple. The rule says that you should save about 10% of your income / salary every month.

In most cases, this advice is about saving 10% specifically for retirement*. So if you are looking for answers to ‘How much should I save each month for retirement?’ -kind of questions, then that’s your answer.

* Which also means that you need to save more for other financial goals like saving for children’s education and marriage, your house purchase, etc.

But is that the right answer?

Read further…

 

Why Saving just 10% Salary is Not Enough?

Yes. Saving just 10% of your income doesn’t work in most cases.

I personally think that people should not even refer to it as a ‘rule’.

Everyone’s financial situation is different – their ages, incomes, income stability, family situations, careers, life and financial goals, financial situation of near and dear ones, etc. There is no way one savings rule can apply to all those different situations.

Another important thing to understand here is that saving 10% of your salary also means that you are spending the other 90%.

saving 10% spend 90%

This might be fine when you start working. But later on, it can create problems in your personal financial life.

As your income increases every year, you will continue to save 10%. So you will also continue to spend 90% of your increased income as well. As a result, your standard of living will rise as fast as your savings. And as Michael Kitces (a noted name in financial planning space) puts it

This steady creep towards an increasingly expensive lifestyle as our income rises may not only crowd out the ability to save now, but leave little room to save in the future as earnings growth slows.

Now since your expenses are rising in line with your income, it also means that the amount needed to reach your retirement gets larger and larger given the retirement costs to be supported, and in the end it’s surprisingly difficult to reach a corpus that can allow you to live comfortably in retirement.

This 10% rule will work (and you will continue to spend rest 90%) easily as long as your income continues to rise. The increases in your lifestyle costs will not be much problematic. Sadly, you won’t even realize it’s happening as these lifestyle changes just keep creeping up on you.

But once your active income ends (day after your retire), you will find it tough to maintain your ever-increasing lifestyle.

Most people seem theoretically ready to downsize their expenses once they retire.

But do you think its easy to change yourself after 60 years?

I can bet its not. In early 30s myself and I find it tough to change (ask my wife) :-). There would be very few people above the age of 60 who will have no troubles changing everything about their life after 60.

Note – Its possible that the 90% Spending I have assumed, infact includes you paying towards your home and other loan EMIs. If that is the case, your ability to ‘actually’ save more will increase when the loan is paid off. But even then, remember that you really cannot count your house (for which you are repaying a loan) towards your retirement fund. You won’t sell it to survive in your retirement. Isn’t it? So responsibility to save enough for your retirement is on you, irrespective of whether you are unable to save much due to a loan or otherwise.

 

How much should You be Saving Every Month?

I am not saying that 10% figure is wrong.

If you are not saving anything, then even starting to save 10% is a big achievement.

Point that I am trying to make is that it might not be enough.

So what percentage of your salary should you invest every month?

10% – 20% or 30%???

As with most things in personal finance and financial planning, there is no one perfect or mathematically exact answer here.

So lets say that you have no clue about how much you should be saving every month from your salary. And for all practical purposes, you are saving almost nothing now.

For you, the best thing to do right now would be to not worry much about what is the right percentage to save every month. And instead focus on atleast implementing the 10% Savings rule initially.

This 10% Rule can be a good start. It can be a stand-in approach till you can figure out what is suitable for your needs.

Now how do you know what is suitable for your needs?

List down all your financial goals, estimate each goal’s fund requirement in future (after considering inflation), convert this into a sort of monthly savings number. Sum up the monthly savings number for all goals and you will know how much to save each month. This also sums up nicely what goal based investing is all about.

Whether its possible to save that much or not is another question (goal affordability). If its not possible to save that much, then you need to prioritize your goals and see what is important and what’s not. Prioritizing goals based on importance helps in deciding what to aim for, given current income and expenses. It also tells what needs to be postponed or dropped till you earn more, so that you don’t fail to achieve your other essential goals.

The answer to question about where to invest depends on a lot of factors. You can classify these goals into small, medium and long-term goals. Then prioritize decide the investment asset (or product) for each based on return, safety and liquidity requirements.

So as you see, your ability to rightly answer the question about ‘required saving in each month’ depends on the clarity you have about your financial goals.

Talking about goals, one major one is retirement. Calculations for retirement savings goal are little different from others, as you will not use up all the money saved for retirement in one go, unlike in other goals (marriage, house purchase, etc.). So if you don’t know how to go about calculating the required investment amounts for each goal (including for retirement planning), then you should consider taking professional help (How?).

 

What if You don’t have clarity about Goals or if Really can’t save much?

Many people are not very clear about their life goals (many of which are financial goals too). Mostly, this is the case with young people.

For them, using some rule like ‘Saving 10% or 15% of their monthly salary can help bring in the required disciple to survive on less and save a fixed portion of their incomes regularly till they don’t know what they are saving for.

Sadly, many people really run a tight ship every month living paycheck to paycheck. Due to various personal responsibilities, they don’t have much left to save after they have paid for non-negotiable expenses.

They can’t even afford to think about questions like How much should I be saving every month? OR How much percentage of the monthly salary should be saved monthly?

Instead, they are more worried about how to actually save any money from their monthly salaries!

For them, its best to not to be discouraged.

If they are able to save less than 10%, even then that will do them a world of good. Saving something is always better than nothing. Also its important for them to focus more on increasing their incomes and ensuring that expenses don’t rise at the same pace as income. This will leave them with surplus to increase savings in future.

That was about those who have real problems with saving itself. But what if someone is a big-time spender and cannot save because of their spending habits? For them, its important to rethink their priorities and what money can do for them. I have written about this in detail at Wisely balancing Spending Today Vs. Saving for Future.

On the other hand, if unlike all above mentioned types of people, you are earning well and don’t spend a lot, you already have a big head start in more ways than one. You can save a lot more for all your financial goals and reduce pressure later on when responsibilities rise. You can even consider retiring early if you wish! 🙂

 

2 More Useful Rules about How much Money to Save Every Month

I firmly believe that knowing how much to save (each month/year) towards all your financial goals is the way to go. That way, you can track and save for each goal on different priorities and requirements.

Here is a simple but theoretical sample of what goal based investing.

goals financial planning

The image above shows how you will be saving towards specific goals and not just invest randomly. Its an interesting approach to manage your money. Here is a very detailed guide I wrote on Goal based Investing.

But if you still believe that saving a fixed percentage is what you want to do, here are few more that I personally think are better than the 10% savings rule.

  • Save Your Age – If you are 26 years old, you should save 26% of your income. If you are 40 years old, you should save 40% of your income. Or simplify it to save 20% in your 20s, 30% in your 30s and 40% in your 40s. This is not a perfect approach, but much better than just saving 10%. You can read more about this ‘Save Your Age’ approach here. Another option can be to save atleast 1/2 your age as income. So 10% in your 20s, 15% in your 30s and so on.
  • Save 50% of your Future Pay Hikes If you currently earn Rs 5 lac and get a hike of Rs 1 lac somehow, you should save atleast 50% of that hike. This is an interesting approach that doesn’t focus much on saving more today but on ensuring that you save more from your future income increases. This helps as your spending is controlled and it doesn’t increase as rapidly as your income in coming years. Your standard of living related expenses will improve in more controlled manner and you will be saving more and more every year. You can read up about this systematic approach to save more here.

 

Finally…

To summarize, its true that savings are important. And you should try to save a decent part of your income towards retirement and other financial goals. Young people should try to understand the stunning power of time they have and save as much as possible.

But just saving 10% or 15% of your salary won’t work in most cases. But nevertheless, it’s a good target to aim for if you still haven’t started saving.

How much should you be saving from your salary every month? Lets not jump and immediately try to find the right percentage of salary – to answer that question. No doubt its very easy to give sage-like advice and suggest a fixed percentage like 10% or 20%.

But if you really want to take a shot at achieving your Real and Actual Financial Goals, creating a well thought out plan based on real numbers is absolute necessity. Your path will be clearer and you will know what you need to do.

Saving just 10% of your income won’t be of much help in the long run. So don’t depend on that figure and instead, save and invest according to a plan.

4 comments

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  2. If one saves only 10% he won’t be able to achieve financial freedom, forget about passive income being more than active. It was a very good article dear Dev.

  3. I totally agree with you Dev.

    I see so many of my colleagues happy with lesser than 10% of income in savings that too in taxable debt instruments like FDs and living a lifestyle of a king today borrowing into the future for depreciating assets. This mentality of ‘Kal kisne dekha hai’ is steadily on rise in today’s world.

    My personal thumb rule is very simple in this regard. If my basic expenses per month are 40000 Rs apart from EMIs which will not be payable post retirement then I need to save 40000 Rs today to get the same amount in the month 22 yrs from now when I retire assuming my returns exactly match inflation.

    Next month’s savings equivalent to next months expenses will support me the month 22 yrs after next month.

    This is huge savings need. And it can only support me for 22 yrs post retirement. If one ends up living longer or getting returns lesser than inflation then he’ll have to depend on children to support him or reduce basic expenses.

    I’m not even considering lifestyle needs above basic expenses.

    If the returns are above inflation then it adds few years of comfort hence the need to invest in to equity is utmost important for retirement funds. Even managing to get inflation equivalent returns will sail you through well without having to take unnecessary risks.

    Hence it’s important to stop thinking in terms of %ge of income as savings but as a 100% of expenses on per month basis.

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