The 20% Question: How Much Of My Pay Should I Really Save?

The 20% Question: How Much Of My Pay Should I Really Save?

When it comes to making financial progress, we can all agree that saving for the future is a critical part of the equation. But how much are you supposed to be socking away exactly?

According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50% should be reserved for essentials (think housing and food), 30% should be allocated for lifestyle choices (things like nights out and 121 channels of cable), and at least 20% should go toward what we call “financial priorities”, which include debt payments, retirement contributions and, of course, savings.

Since these percentages are divisions of your net pay — the after-tax income that you bring home — someone who makes, say, $35,000 a year should set aside at least about $4,800 for financial priorities. Think that sounds like kind of a lot? You aren’t alone. That’s why we spoke to LearnVest Planning Services CFP Tonya Oliver-Boston to find out if we really need to allocate 20% of our income toward financial priorities each year — and how much of that 20% should go into savings.

Why Anyone Can (and Should!) Follow the 20% Rule

For many people, putting at least 20% of their net pay toward financial priorities isn’t actually all that difficult. In fact, Oliver-Boston finds that the biggest problem clients generally face isn’t that they can’t manage to allocate the 20% for financial priorities — rather, it’s that outsized debt, like student loans and high credit card balances, that eats up most of that 20%, leaving little left over for savings. But as Oliver-Boston cautions: “Even if you have debt in excess of 20% of your net income, you still need to find a way to save!”

Translation: Prioritising one financial priority doesn’t mean that you can ignore the others — be it debt payments, adding to your emergency fund, contributing to your retirement or other savings goals, like accruing enough money for a down payment on a house.

So what’s the best way to divvy up that 20% across all of your financial priorities? “It depends on the individual situation,” says Oliver-Boston. “But emergency savings and payments on high-interest debt tend to fight for first priority.” Retirement, she adds, is usually a strong third because it’s critical for your long-term financial health, followed by other savings goals, like that down payment we mentioned.

Need real-life examples? According to Oliver-Boston, if a client has a lot of high-interest debt but also has emergency savings, the client’s first priority would most likely be the debt because she has money in place to support her should she find herself in a situation in which her income could no longer cover her living expenses. If a client is cash-strapped, however, putting money into an emergency fund would probably take priority because the client doesn’t have the necessary cushion to cover her day-to-day expenses should an emergency arise.

Think You Can’t Save Enough? Think Again

In most cases, it’s unlikely that you simply don’t have the money to put toward your financial priorities. It’s more likely, explains Oliver-Boston, that you’re devoting too much of your income to another category of spending. For instance, if your essential expenses are in excess of 50%, there’s a good chance that the culprit is a rent or mortgage payment that’s too high for your income. There’s good news and bad news here: On the bright side, you can quickly free up a lot of money. On the not-so-bright side, you’ll have to make a big change to do it… like a move.

“It’s a sticky situation,” says Oliver-Boston, “because you can’t make a client move. But when it’s pointed out to you that the troublesome element of your budget is a fixed percentage, it shouldn’t be surprising that you don’t feel like you’re getting ahead.”

If it isn’t your fixed expenses that are throwing your budget out of whack, then it’s probably your lifestyle choices. This, too, is changeable. Since few things you truly need fall into this category, you should be able to eliminate lifestyle expenses fairly easily. That said, since dinners out tend to add up slower than, say, rent, it might take a while.

“It’s almost like weight loss,” says Oliver-Boston. “Changing your essential expenses is the equivalent of having surgery — it’s immediate, so you see the change right away. But changing your discretionary spending is like losing a pound a week. It will take a bit, but you’ll get there.”

To be fair, Oliver-Boston qualifies, the people who are having trouble saving 20% aren’t necessarily making unwise choices when it comes to properly allocating their money. “During the downturn, a lot of people used credit cards to get by without an understanding of how much debt is too much,” she says. “And now they’re getting jobs at lower pay rates, plus the student loans they deferred are now due.” So although many people in this situation are working, she says, they’re not making as much, so they continue to use credit cards to get by. “For these people,” she says, “the change they would need to make in their lifestyles to save enough money would be dramatic.”

But regardless of whether your budget is a little unbalanced or you’re recovering from a major financial shock, Oliver-Boston’s advice for finding the funds for your financial priorities is the same. “First of all, you need to take a realistic look at your expenses, because turning a blind eye isn’t helping anybody,” she advises. “And, second of all, you have to be willing to change.”

This post originally appeared on LearnVest and has been updated since its original publication.

Libby Kane is the associate editor at LearnVest. After graduating from Wellesley College, where she was an editor at the Wellesley News, she joined the LearnVest team. Her work has appeared on the Huffington Post, Forbes, the Fiscal Times and more. Libby spends her time visiting the best museums she can find — the mustier, the better. Follow Libby Kane on Twitter and Google+.


    • Exactly what I was thinking. It would be hard to find a place to rent that it 50% or under, then add in other essentials like food and electricity? You’d be dreaming

      • It’s a pretty simple concept. If you can’t afford the “necessities” on 50% of your income then you’re living above your means. Living in the city is a lifestyle choice, living on your own is a lifestyle choice, etc… It takes sacrifice to get ahead.

        • ^ Dont splurge if you cant afford to, especially if you have longer term goals of financial stability/freedom, travel or investment. Cut down on the Foxtel, the expensive ADSL connections, and the smartphone upgrades. Skip a few beers with the mates if you have to. Live within your means. I think its stupid in this day and age not to want to save at least 20% of your income, even if it is just for a rainy day and nothing more. My mortgage chews through 50% of my income easy. I dont have Foxtel, dont drink or smoke, on a cheap mobile plan with a 3 year old Samsung Galaxy S, and drive a 15 year old Camry because I have bigger goals in life that me and my partner are working towards. My only debt is my mortgage which I hope to knock over in the next decade.

  • Blakey, how so? I can just about barely do it. Not with much room to spare, but in terms of ESSENTIAL fixed expenses (mortgage, insurance, utilities), I just barely manage it.

    • I’m single – so average rent would be around 35-40% of my salary….and I’m on a decent salary! Add in other none-shelter expenses and 50% gets blown out of the water.

    • Rent in Sydney is 85% of my AUSTUDY (power bill’s on top of it). I’ve landed some lucky casual work until next month on top of my study that puts rent/water/net down to about 47% of my total income, but if I wanted to earn any more than that, 60% of the extra income would be taken out of my AUSTUDY. If I moved further away from uni, the reduced rent would be offset by increased commuting costs.

  • Most of my money goes on paying off debts that I stupidly racked up in my early 20s. I feel like it’s more important to get rid of them, than to save (because of interest), but once I’m out of debt I think I would be able to save 20% or more (and I’m in Sydney, but my rent is great – I’m very lucky).

  • Blakey, I’m lucky in that my current rent is about 25% of my salary, and the next 25% I save toward a down payment. I expect to be taking on a mortgage that is closer to the 40% mark, soon. But again, I’m helped by the fact that I’m single, which means that I won’t have as many expenses are the sole earner in a family of 5, for example. Food and other expenses run about 30%, which puts me just over the 50% mark with my current rent.

  • I save 30% of my after tax income easily and I live in Perth. and no, I don’t work in mining.
    I never go to clubs or bars, I don’t drink or smoke and I always choose affordable places when I go out for dinner.

  • I think that Libby is basically saying is move out of Sydney and probably Melbourne……move to Tasmania and be unemployed.

  • Seriously people?

    How about you develop a sense of responsibility for your choices? An internal locus of control?

    Who is responsible for your rent being 50% of your income?

    Your employer? The government? Your landlord? Your parents? The economy?

    Yes, the argument can be made that all of these things are true, and at the end of the day the most important, and clearly recurring, factor in all those issues is YOU. You are responsible for yourself, your expenses, and the way in which you react to every factor that influences these things.

    • Okay, I thought that I might just put a little example of two individuals and explain why I imagine there is scepticism for this concept. Having HAD to make things work with what I’m given in the past few years, I’ve experienced the Sydney life on a $20k a year salary, a $40k a year income and am currently earning over $120k a year.

      Person #1 earns $40,000 a year, taking home $675 a week (a higher income than over 50% of Australian taxpayers). Person #2 earns $80,000 a year, taking home $1,170 (a higher income than over 80% of Australian taxpayers).

      Person #1 pays an average of $10 a meal (conservative, considering a can of drink is $3) and $200 to live near to work (or $150 to live in woop woop and pay $50 in commuting fees). Already 60% of the income has been spent without considering any entertainment or past-time activities, let alone savings.

      Person #2 pays an average of $15 a meal (unreasonably conservative) and $250 a week because he/she feels there should be some benefits of earning more than 80% of taxpayers. Food and rent has consumed 48% of their income.

      Now, you can look at sharing a room in a bunk bed and eat rice and pasta for this concept’s benefits to really make sense. From my point of view, I can see it being a challenge for the average Australian to make do with having all of their expenses paid for with 50% of their income.

      The question I’d like to ask is; will saving 20% of your income really be worth the lifestyle sacrifices, or should you be working towards a higher salary, which will suck up a lot of your ‘entertainment’ budget?

      For those that still live at home, make the most of it!

  • We save enough. I personally save around 15 to 20 percent of my wage.. but my wife saves around 50% of her’s. I also get rental income that I save around 75% of.. so in the end I think it’d work out at around 40% of total income.

  • WOOOW im soo glad i still live with parents! Save 100% of wage, Interest covers rest of expenses.. (budgeting extreme this year)

  • I save roughly 44% of my take home pay! I put an extra $25 a fortnight into tax and super so I get a better return at the end of the financial year, I’m also currently attempting to bring down all of my entertainment expenses – mobile and foxtel. Only able to do this due to still living at home however pay rent and help whenever I can, the main reason for saving is because I want to own my own home, hopefully at the rate I’m going I will have a decent deposit before I’m 30

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