How I Answer This Question: “How Much Money Should I Save?”

Savings, piggy bank

Savings bank | Source: iStock

With the exception of discussing hypothetical lottery winnings, most people don’t enjoy talking about money. In fact, society labels it a taboo topic. Money is dirty, complex, and supposedly the root of all evil. I’m always pleasantly surprised when someone brings it up first in conversation.

A poll from Wells Fargo finds 44% of Americans say the most difficult subject to talk about is personal finance. People would rather talk about death (38%), politics (35%), religion (32%), taxes (21%), and personal health (20%). That’s a bit puzzling since America is home to the world’s largest economy, stock exchange, and bond market. Wells Fargo, based in San Francisco, is the most valuable bank on the planet. Given these conditions, you’d think money would make for a good discussion.

Since I read, write, and breathe personal finance for a living, a friend or acquaintance will once in a blue moon ask me a question regarding money. Sometimes it’s about what the stock market will do (as if I have a crystal ball), other times it’s more reasonable questions about different types of retirement accounts. My favorite question is: “How much money should I be saving?”

It’s a broad question considering everyone’s financial situation is different. After all, we call it personal finance for a reason. But, I try to always give the same, applicable answer: “Save 10% of your income to get started, and at least 20% as you improve your spending habits and budget. Ideally, you should save as much money as reasonably possible.”

The 10% starting point creates a realistic goal that anybody can achieve, and even calculate without grabbing a calculator. A ten percent savings rate is likely not enough to ensure your financial future, but the first steps are the hardest. Small victories lead to bigger triumphs. Two in three Americans don’t have enough money in their savings accounts for a financial emergency, such as a $500 car repair. Nearly half of Americans think they need at least $50,000 to justify working with a financial advisor. Baby steps are needed.

Once you’re in the saving mindset, it’s within the realm of possibility to achieve a 20% savings rate. Sure, you may have to plan your grocery list more carefully, avoid cars that take 5 years or longer to pay off, and find ways to earn additional income, but the day will come when you’ll need to retire. Due to compounding returns, the longer you wait to get serious about saving money, the harder you make it on your future self to afford life.

The last part of my answer is the best part. What does it mean to save as much money as reasonably possible? You should take a realistic look at your wants and needs, and decide if you’re getting the most value for your buck. More often than not, the expensive shiny things we desire fail to provide long-term happiness. Like the Chinese proverb says, “A small house can hold just as much happiness as a big one.” Once you recognize that simple truth, you’ll find yourself being able to save more money than previously thought. There’s no rule that says you can only save up to 20% of your income.

Just because we live in a consumer-driven economy where instant gratification is marketed as a happy pill, doesn’t mean you have to swallow the status quo.

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