What’s the Right Savings Rate for Millennials?

My Millennial money tips this month focus on how to think about debt, teach your kids finances, and pick the right savings rate for your life

The idea of a “right” savings rate raises an important question: what’s a savings rate?

*Editor’s Note: I originally published this article in my Millennial finance newsletter, which you also can get twice each month (for free) by adding your name here*

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What Is a Savings Rate?

Do you remember the first time you saved money? You probably did so accidentally. You spent a little less money than you earned, and… you had some savings!

Not long after, you may have enrolled in your company’s 401(k) retirement savings plan. You checked a few boxes during open enrollment at work. Then, at the end of the year, you realized… you had some savings (without really trying)!

These cases show why few people talk about their specific savings rate. Saving money feels hard. We’re concerned that we’re not doing enough. We wonder how much our friends and co-workers save.

Here’s a definition for you: your savings rate is the percentage of your income that you save each year.

The rate can vary by month or year. But knowing your current savings rate can help you to manage your money. When you set a target savings rate for yourself, you can make more thoughtful spending decisions that better reflect your values. You also can keep your spending increases – often referred to as “lifestyle creep” – in check.

The best way to reach your savings rate goal is to automate regular contributions to your savings account. But what’s the right savings rate for you?

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Common Savings Rate Rules of Thumb

Your savings rate should be unique to you and your life. But to start, you may want to review a few of the most commonly cited rules of thumb.

The 50/30/20 Savings Rate Rule

As one possibility, personal finance author Ben Carlson would draw your attention to the long-standing 50/30/20 rule. Carlson writes:

• 50% of your budget should go towards necessities (mortgage/rent, food, insurance, etc.)
• 30% of your budget should go towards (restaurants, travel, entertainment, etc.)
• 20% of your budget should go towards savings (retirement, emergency savings, etc.)

By comparison, financial advisor Matt Becker shares what he has heard from other sources:

• Elizabeth Warren says that you should aim to save 20% of your net income (after taxes).
• Dave Ramsey… recommends saving 15% of your gross income (before taxes).
• My college finance professor made us promise that we would save at least 10% of our first paycheck, and keep doing that for the rest of our lives.

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In his role as a financial advisor, Carlson has spent years thinking about savings rates.

And “after crunching all sorts of numbers and scenarios and my own personal experience,” he’s settled on a strategy. When you’re starting out, he says, your goal should be “a double-digit savings rate as a percentage of your pre-tax income.”

Then, you gradually begin to work your way up from 10%. Ultimately, you may want to aim for “an end state of say, 15-30%, depending on your needs, desires, and risk appetite.”

And when you’re struggling to balance your savings with other financial priorities, “simply maintain your savings rate as a percentage of your income over time.”

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After enough reading, you may find that 15 percent is the most commonly recommended savings rate. Becker believes that this suggestion ties to the standard retirement age in the U.S. Here’s how:

• Young adults typically graduate from college at age 22
• The IRS has previously designated age 65 as “full retirement age”
• With a 15% savings rate, you would need about 43 years to “save enough money to be financially independent.”

And fittingly, 65-22 = 43. But Becker doesn’t want you to latch onto this neat math.

He emphasizes that small increases in your savings rate can mean big leaps on the path to financial independence. For instance, “Jump from 15% to 20%, and you can reach financial independence 6 years sooner. If you can get your savings rate all the way to 50%, financial independence is only 17 years away.”

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Exceptions to Every (Savings Rate) Rule

But a 30%-50% savings rate is aggressive, particularly in a high cost-of-living area.

As Ben Carlson cautions, with any general guidance you hear, “there are exceptions. Your lifestyle, where you live, spending habits, and personal circumstances play a big role” in what your savings rate should be.

Becker adds that, “A higher savings rate isn’t always better. A lower savings rate isn’t always worse.” Instead, he argues, your savings rate should reflect your personal goals. Not any rule of thumb.

“What kind of life are you trying to build?,” he asks. What does financial freedom look like to you? The answers to those questions will lead you to the savings rate that’s right for you.

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The Right Savings Rate for Millennials

Carlson’s colleague Nick Maggiulli believes the best savings advice doesn’t even include numbers or percentages. He once wrote:

“The best saving advice is: save what you can. When we have the ability to save more, we should save more—and when we don’t, we should save less. If you follow this advice, you will experience far less stress and far more overall happiness.”

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The Millennial Finance Newsletter: June 10, 2024

For your days ahead: 3 perspectives, 2 articles, and 1 idea from me.

​Three Perspectives

1 / What’s the “right” savings rate? (editor’s note: see the article discussed above!)

2 / Five experts suggest ways to achieve your most ambitious goals.

3 / Creative ways to teach your kids how to manage money.

​Two Articles

1 / What to do when your company’s 401(k) isn’t great.

2 / How to think about debt.

One Idea From Me

Did you know that the best cross-country skiers in the world spend 88% of their training time at a *light* intensity level? Research shows that professional runners, cyclists, rowers, and swimmers take a similar approach. So unexpected, right? I incorporated this idea into how we think about money management, since I don’t believe we apply the same strategy to our finances:

1 / “How much suffering should financial stability require from you? As an alternative to acute pain, what if you plan to work an extra 6-12 months before you retire? Now, you may not want to choose that path. But the math at least gives you the option: that extra time at work is equivalent to saving 1% more of your salary over 30 years.”

You can read more in An Alternative to Saving More Money.

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Your Questions About What the Right Savings Rate Is For You

I hope these articles help! Please feel free to send me an e-mail at kevin@illumintfc.com with any follow-up questions. You also can subscribe to my newsletter here to learn more about how you can turn your money into memories with your family. I typically send the newsletter twice each month.

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Recommended Money Reads for Millennials

If you liked this article, you may also want to check out:

• A Children’s Book About Money
• The 5 Best Finance Podcasts for Millennials in 2024

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About Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!