Get ready for a radical money-management idea that's becoming increasingly popular. The idea, in two words, is: "Save half." Save 50% (or more) of your after-tax income. Funnel these savings into building an emergency fund, aggressively repaying debt, and building your retirement portfolio.
At first glance, this sounds like an insane idea, but there's a small subculture of people who are saving half of their money. These savers find that the peace of mind and flexibility this generates is worth the effort, and many people achieve this on middle-class incomes. They may earn a take-home income of $100,000 per year, for example, and live on only $50,000 per year. Or they may earn $80,000 per year, but live on a household budget of $40,000.
Benefits of Super Saving
These savers are often able to repay their mortgages within five to 10 years, rather than stretching the debt out to 30 years and paying significantly more in interest. They're able to finish saving for their children's college funds when their kids are still in early elementary school.
They're able to max out their retirement accounts, pay cash for their vehicles and enjoy the comfort of knowing they have a surplus that they can tap for unforeseen events. If you're interested in trying to save 50% of your income (or at least step closer to this goal, perhaps by saving 30% or 40%), the following are a few tips.
Live on One Income
If you're a dual-income couple, the easiest way to save half is by living on one person's income while saving the other. Start by living on the higher of the two incomes. Spend several months adjusting to this budget. Once you're comfortable with this, try to transition to living on the lower of the two incomes.
By doing so, couples face an extra benefit: If you later decide to literally become a one-income couple, such as if one of you stays home to care for children, you'll be ready. Not only will you already be in the habit of living on one income, but you'll also have years of accumulated savings. You will have also made major life decisions, such as your mortgage, from the perspective of paying for it with just one income.
Boost Your Income
If you're making a six-figure salary, saving half is much more attainable. If you're making $22,000 per year, however, it's not. At the lower end of the income spectrum, people are best served by earning more. This rapidly increases your power to save half, because you can throw every dime of that extra income directly into savings.
Focus on Big Wins
When saving, start by targeting your three biggest expenses. For most people, this will be food, housing, and transportation. You may need to downsize to a smaller home. Some people have saved half by moving into a duplex or triplex and living in one unit while renting out the others.The rent from the other units covers their mortgage, so they avoid having any out-of-pocket housing expenses. If that's not appealing to you, consider downsizing into a smaller house or apartment. Not only will you save money on your mortgage or rent, but you'll also save on utilities, furnishings, and maintenance costs.
Save money on transportation by living closer to work, driving fuel-efficient vehicles, and walking or cycling if possible. Save on food by cutting out restaurants and dining expenses. Consuming a mostly vegetarian diet (or at least cutting out red meat) can also help you save on groceries. These three categories alone will generate a lot of traction toward the goal of saving 50%.
Target Your Recurring Costs
When saving, don't forget about the "invisible" expenses. It's easy to focus on groceries and gas because they're tangible. But people often forget about insurance premiums, mutual fund fees, and myriad other invisible and intangible expenses that create a big impact. Spend one afternoon per month reviewing your budget and asking yourself how you can trim these intangible costs that still consume resources from your bottom line.
Frequently Asked Questions (FAQs)
Why is it important to save money?
Saving money allows you to work toward important goals and ensure you're protected in the event of a financial emergency such as losing your job. You can build an emergency fund, save for a down payment on a house, prepare for retirement, plan for your or your child's education, and more. Because emergencies and many of life's major expenses are costly, it takes months and years of planning and saving to achieve them.
How much should I save each month?
There's no set amount you should save every month, but most experts recommend starting with 10% of your income and working toward more from there. As you build habits saving a smaller amount, it gets easier to set aside more of your income for the future. One helpful way to think about is it that you should always save enough to where it makes your budget feel a little tight.
Where should I save my money?
When you're deciding where to put the money you're saving, consider the purpose for which you're saving it. Money that you need to access should go in an interest-bearing savings or money market account. Funds that you won't need for a little while can go in higher-return accounts like certificates of deposit. Retirement funds belong in a 401(k), IRA, or similar type of investment vehicle that you won't tap for decades. Where you put your savings is just as important as how much you save.
FAQs
Not only will you save money on your mortgage or rent, but you'll also save on utilities, furnishings, and maintenance costs. Save money on transportation by living closer to work, driving fuel-efficient vehicles, and walking or cycling if possible. Save on food by cutting out restaurants and dining expenses.
Is saving 50% of income good? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
What should 50% of your income go towards? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
How long will it take to achieve financial independence if you save 50% of your income? ›
Boost your savings rate
For those who are able to retire in their 60s or 70s, they may end up having much less money than they think. But by saving about 50% of your income, the average person can reach financial independence in 10 years or less, Sabatier said.
What is the 50 savings rule? ›
The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
Can I retire at 60 with 300k? ›
£300k in a pension isn't a huge amount to retire on at the fairly young age of 60, but it's possible for certain lifestyles depending on how your pension fund performs while you're retired and how much you need to live on.
How much money do you need to retire with $80,000 a year income? ›
So, "for an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04), assuming "a 5% return on investments, after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire." This rule ...
What is the $1000 a month rule for retirement? ›
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
How much money do I need to invest to make $3,000 a month? ›
If the average dividend yield of your portfolio is 4%, you'd need a substantial investment to generate $3,000 per month. To be precise, you'd need an investment of $900,000. This is calculated as follows: $3,000 X 12 months = $36,000 per year.
Can you live on $1000 a month after bills? ›
But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money. Cutting down on housing costs by sharing living spaces or finding affordable options is crucial.
How $100 a month can help make you wealthy
| If you invest $100 a month for this many years... | ...this is how much you'll end up with. |
|---|
| 5 | $8,058.73 |
| 10 | $21,037.40 |
| 15 | $41,939.68 |
| 20 | $75,603.00 |
2 more rowsOct 1, 2023
At what age should you be financially stable? Financial stability is more about maintaining control over your finances rather than hitting numbers at a specific age. However, aiming to attain stability by your late 20s to early 30s can be beneficial, allowing time for savings, debt reduction and investments.
At what point are you financially free? ›
Everyone defines financial freedom in terms of their own goals. For most people, it means having the financial cushion (savings, investments, and cash) to afford a certain lifestyle—plus a nest egg for retirement or the freedom to pursue any career without the need to earn a certain salary.
Is saving 50% of income too much? ›
It's our simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.
How much should the average 50 year old have in savings? ›
By age 50, you'll want to have around six times your salary saved.
Does a 401k count as savings 50/30/20? ›
A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.
Should I invest 50 percent of my income? ›
Although that percentage can vary depending on your income, savings, and debts. “Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine.
Is saving 40% of income good? ›
Cardone said that the 40/40/20 rule has a proven track record of success. “If you would save 40% of your gross revenue and use that to invest — not to live — I guarantee you'll create wealth for yourself,” Cardone told GOBankingRates.
Is saving $50 a week good? ›
If you invest $50 per week, that's the equivalent of $200 per month, or approximately $2,400 per year. Over a 30-year period, that would result in more than $72,000 in savings. It's a good chunk of savings, but it isn't a life-changing amount.
Is saving 60% of my income good? ›
Include your normal salary, revenue from side jobs, renting or other passive income, and more. Multiply that sum using the 60-30-10 budget guideline. According to this rule, 60% of an employee's income should be saved or invested. 30% should be allocated to necessities such as housing, food, and transportation.
