How Much Should You Save?

Americans are currently saving an average of 4 percent of their annual income. This is the lowest savings rate for any country in the developed world. At a seminar I just completed, a participant asked me, “Well then, what is the right percentage of our income that we should be saving?” Glad you asked.

First, make a distinction between money that you want to save and money that you want to invest. Savings should be money that is relatively safe and can be accessed at any time a need arises.

It is important to save $1,000 and to keep that money on hand in an Emergency Savings Account that you do not spend unless absolutely necessary. Next, keep saving until you have 3 to 6 months of your living expenses in this account.

After these savings goals have been met, you should save for major purchases and begin using those funds to invest. Most people I talk to have a problem because they start investing money BEFORE they have adequate savings. This means when an emergency arises, there is normally a penalty to take money out of your retirement plans.

Think of the horse and cart analogy. The horse comes first. It should be a regular savings habit sufficient to meet these two goals. The cart is the long-term investments that come later. The percentage is up to you so long as you are able to hit these minimum savings targets in a reasonable amount of time. Once you have hit those targets, I think a regular habit of saving 5 percent of your income is appropriate.