How Much of Your Salary You Need to Save

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip gives some thoughts on how much of your salary you need to save:

If you're not saving 10% of your salary, you aren't saving enough.

The earlier you start saving, the less you'll need to set aside every year to meet your goals. That's because you allow your money more time to grow -- the gains on your invested savings will build on the prior year's gains. That's the power of compounding, and it's the best way to accumulate wealth.

Saving at least 10% of your annual salary for retirement is recommended, but the older you start saving, the more you'll need to save. If you start at 50, you may need to put away 30% a year and still postpone retirement by a few years.

Personally, I'm a big fan of the "save more earlier" strategy. That's what I've done -- tried to put as much away as possible as early in my life as possible so then the power of compounding do it's magic. It's just starting to kick in for me in a big way -- my investments are just now starting to deliver substantial increases from year to year by themselves (even if I didn't keep contributing to them.)

So, how have I managed to save this much? It starts with spending less than you earn. If you do this through the years, you can become quite well off. (By the way, if you're having trouble spending less than you earn, you may want to check out my past posts on how to save money and how to make more money.)

I then take the money I've saved and invest in my 401k (where I get free money from my employer in the form of a match) as well as in taxable accounts. My preferred investment vehicle is index funds.

Simply do these simple steps over and over again for years, and you're bound to get rich.

Comments

[Lord]

David Bach did a nice take on this. If you want no or a poor retirement save 0-5%, working class 5-10%, middle class 10-15%, affluent 15-20%, early or rich 20-25%. If you don't start early, don't plan on one.

[CIWOODciwood]

At age 43, I had nothing. For the next 10 years I saved 15% and for the last 3 years, I have saved 40% which I will do until I am 70 (12 more years). If I had saved 10% from the start when I could, I would have been prepared for the emergencies that came along and life would be more enjoyable now. I now have $550,000 and will retire with $2,000,000 if my health holds up.