How to Know if You’re Saving Enough

Saving money can come with a lot of anxiety, and one of the biggest is worrying if you’ve saved enough to live the life you want when you retire. The answer could be your savings rate.

Many lawyers want to know if they’re saving enough money.

Should it be 10% of their income? 20%? 30%?

Or maybe, is it better to focus on specific dollar amounts like $1,000/mo, $2000/mo, etc?

It’s one of the most difficult questions to answer because “as much as possible” isn’t actionable advice.

It’s like making a New Year’s resolution to lose weight. You can’t do anything with such a vague goal, which is why it’s doomed to fail.

Yet, your savings rate is the single most important factor in building wealth. It’s way more important for a “young” investor than worrying about what return you’ll get in the market.

Rather than focusing on how to eke out a few more percentage points of return, he would be much better off focusing on how to increase his savings rate, whether that’s increasing income or decreasing expenses.

Example 1. Larry has $50,000 saved and is adding $10,000 a year. In 15 years, assuming an inflation-adjusted return of 6.55%, Larry will end up with $372,250. If he managed to earn an additional 2% return, he’d increase the size of his stash to $454,595.

Getting an extra 2% obviously isn’t a bad outcome, but it didn’t move the needle very much.

Example 2. Larry has $50,000 saved and is adding $30,000 a year. In 15 years, assuming an inflation-adjusted return of 6.55%, Larry will end up with a staggering $857,750.

Clearly it’s a better result if Larry focuses on finding out how to save an extra $20,000 a year.

The opposite is true for an “older” investor (i.e. someone who has saved up a significant nest egg). Let’s run through the same examples assuming someone with a $1,000,000 nest egg.

Example 3. Larry has $1,000,000 saved and is adding $10,000 a year. In 15 years, assuming an inflation-adjusted return of 6.55%, Larry will end up with $2,832,762. If he managed to earn an additional 2% return, he’d increase the size of his stash to $3,706,748, for a gain of almost an extra $1 million.

But what if millionaire Larry increased his savings rate to $30,000. Would he do significantly better?

Example 4. Larry has $1,000,000 saved and is adding $30,000 a year. In 15 years, assuming an inflation-adjusted return of 6.55%, Larry will end up with $3,318,262. Definitely better than if he had only saved $10,000 annually, but much less than if he had been able to eke out an extra 2% return.

Through those four examples, the results should be clear. When you’re at the beginning stages of building wealth, it’s all about increasing the savings rate. Once you have $1 million (or maybe $500,000, you can allow yourself to start getting into the nitty gritty of getting the best return possible).

How to calculate a savings rate?

If you’re trying to save a percentage of your income, use the amount saved as the numerator and use your entire gross income as the denominator.

This means you’re going to get a lower percentage than if you only used “take home” pay as the denominator.

The debate between whether you should use your “gross income” or “take home” pay in the denominator is the source of a ton of confusion when it comes to savings rate because just about every article you read that discusses saving as a percentage will use a different denominator.

Here’s why I use gross income as the denominator: you’ll be forced to include your taxes as expenses. By including taxes as part of your expenses, you’re acknowledging that actions you take to reduce your taxes also increase your savings rate.

Many lawyers aren’t familiar with the true percentage of their income that goes to taxes, so it’s a good idea to calculate a savings rate using gross income as a denominator so that you’ll become more familiar with the role that taxes play.

But saving a percentage of your income is only so helpful. It doesn’t really tell you anything about whether you’re saving enough dollars (and, as we all know, retirement must be paid for in dollars, not in percentages).

For that reason, I rarely concern myself with my percentage savings rate. Instead, each year we set goals at the beginning of the year for the total dollar amount that we want to save. I track savings each month and we measure whether we’re on target to save the dollar amount that we wanted to save.

This is a personal decision but I suggest you play around with both and figure out what works best for you.

How to increase your savings rate?

Here’s a few steps you can take to increase your savings rate:

(1) Save the Raises. Almost all jobs have cost of living or standard raises over time. While there are times when you need to use the extra money to maintain your standard of living, most of the time the extra money isn’t needed. If you can restrict yourself to living on your income today and save the raises, you’ll find that over time your savings rate increases substantially.

(2) Make More Money. It seems obvious but it’s a heck of a lot easier to save 25% of $300,000 than it is to save 25% of $50,000, even with the higher taxes you’ll pay on a $300K salary. If you can change jobs when there’s an opportunity to make more money, you’ll be doing yourself a much greater service than just about anything else you can do, so long as you …

(3) Keep Your Fixed Expenses Low. It’s not just about overall spending, there’s something special about keeping the fixed expenses low. If you’re not obligated to spend money, you have the option to save more money. This allows you to bounce around between saving and spending each month, making a conscious decision along the way. Try to rent your lifestyle wherever possible. There’s a reason why Felix Dennis said, “If it flies, floats or fornicates, rent it.

(4) Cars and Houses. If you’re looking for the two big ticket items where you can do the most damage, it’s your housing and transportation expenses. Many people budget for a mortgage by calculating the monthly payment to the bank. They forget to add in taxes, utilities, repairs, HOA fees, landscaping expenses, furnishings and any additional upgrades that come with the bigger and nicer house. To make matter worse, the house is a fixed expense so you’re much less financially nimble once you own one. It’s the same with cars, since you can easily lose a great deal of money buying (or financing) a depreciating asset.

(5) Be a Conscious Spender. Many people are surprisingly good at self-regulating spending once they take the time to review their spending or budget accordingly. In other words, I highly doubt you want to waste money. It just happens to all of us, mostly because we’re all busy doing a lot of other things in our lives. If you want to increase your savings rate, set time at the 1st of each month to review the previous month’s expenses and project what you want to spend for the upcoming month. Chances are high you’ll notice a few things that really aren’t bringing you any happiness. Cut those out.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money and is always negotiating better student loan refinancing bonuses for readers of the site.

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    Sixteen thoughts on How to Know if You’re Saving Enough

    1. First off, love the quote by Felix Dennis 🙂

      The main takeaway for me is I should be increasing my 401k and IRA contributions! Right now, I’m saving about $10k a year through those plans… maybe $20k would be better.

      Thanks for sharing – have a good one

    2. I think the appropriate savings rate completely depends on how much you’re making. If you’re only making $50k a year, then I think even a 10% savings rate is amazing. But if you’re making $500k a year, then I think you should be saving 50% after tax.
      But the most important thing is that no matter how much you’re saving, make sure that you are saving SOMETHING each year. That’s what counts. Slow and steady wins the race.

    3. I encourage physicians interested in financial freedom to Live on Half their takehome pay. With a salary of at least $200,000 for most, I think that’s reasonable.

      On the other hand, a lawyer with a five-figure salary should be happy to save 20%. Live like that, invest pay raises, and all should end up well.


      1. Yes, the live on half mantra is a good one and easy to track. Of course the difference between a physician doing that on a $200,000 salary and a lawyer doing that on a $200,000 salary is a substantially inflated lifestyle for the physician. Pretty much every lawyer making $200K is in a high cost-of-living local with high taxes (although not all – shout out to my Houston Biglaw lawyers), whereas physicians seem to be able to command that salary all over the country.

    4. I think you’ve included some really good benchmarks for people to follow, kudos to you on a really well-written article. As a “young” investor in a high-income industry, making the distinction between savings rate and market returns really resonates with me. Particularly for people in finance, we tend to get hung up on market performance, ROE for private investments, and generating alpha. By focusing on savings rate first and performance second, you can take advantage of compounding interest at a much faster clip.

      Thanks again for the good read!
      -Conor @ Millennial Savings

      1. Thanks Conor. You shouldn’t feel alone. Most professionals with a high-income immediately gravitate toward market performance and getting a high return as well. The problem is that you need some significant savings in place before those performance numbers even matter. Thanks for stopping by!

    5. Mortgage and home expenses are the number 1 thing keeping me from FI currently. I was hit with a $300 repair bill for a roof leak just yesterday.

      I think homes are the biggest and hardest thing for people to change because a home purchase is such an involved process. More importantly, selling your home is even more complicated as there are commissions to be paid and if you sell it quickly, finding a new place to live.

      I am a huge proponent of saving the raises/bonuses/tax returns and honestly this is how I have made most of my progress to a positive net worth.

      1. As someone who doesn’t own a home or a car, I think about this a lot and wonder if it’s worth getting caught up in the fixed costs. I’m sure I’ll get there someday (Financial Samurai keeps telling me that building equity through home ownership is a good thing, although JL Collins has the opposite view).

        Saving raises/bonuses/tax returns has been a big part of building my savings as well.

    6. My guideline is save at least 50% after taxes. By including taxes as an expense it’s harder to calculate years until financial independence, especially at higher income levels. It’s tricky though because you have to add taxes back into your spending in retirement or you will underestimate what you need.

      1. I prefer to keep taxes as expenses, but then I’m also not calculating financial independence. I can see why that would make it a little tougher but presumably you’ll just run the numbers twice. One of the reasons why I don’t calculate financial independence is because if I were to be financially independent, I certainly wouldn’t be living in NYC, so it’s kind of difficult to know for sure what my annual expenses would be in a FIRE life.

      1. Thanks for stopping by Jamie. And the other concern is to protect your income from things like disability, particularly when you’re coming out of law school with $200K in student loan debt.

    7. Great tips, especially the point about keeping fixed expenses low.

      Regarding “How to Know if You’re Saving Enough”, I really think it’s imperative to have a goal number for financial independence. Even if you don’t plan on living in New York City, you can make on estimate based on where you might end up, or even on the nationwide average cost of living.

      Once you know your goal number, then you can see exactly how close you are to “saving enough”. If your goal number is $2 million, and you’re saving $10,000 per year, you’re probably never going to make it. On the other hand, if you’re saving $100,000 per year, you’re in great shape.

      Savings rate is interesting to track, and if you’re anywhere between 20% and 50% you’re doing excellent, but the only thing that really matters is your financial independence number and how long you want to take to get there. From there, you can calculate how much you need to save per year.

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