Saving Money: Save 10% of Your Salary and Watch Your Savings Grow

Written by , February 14, 2012

Saving Money Save 10 Percent of Your Salary and Watch Your Savings GrowOne long-established piece of personal financial advice is that you should save 10% of your salary or wages each and every time you get paid. The idea is that by “paying yourself first” you won’t have to scramble to find money at the end of each month to deposit for savings. Instead, you’ll fund your savings before any other spending decisions or choices are made.

The earlier you can begin implementing this rule, the better. If you’re not already doing so, make every effort to begin with your very next paycheck. Even relatively short term consistent savings can add up. For example, if you make $50,000 per year and save 10% of your salary each week (just under $100 of savings) at a 3% annualized return rate, then after only five years you’ll have saved approximately $35,000.

Here is some banking advice and information about how by saving 10% of your salary you can really grow your savings.

  • Choose Safe Investments. In years past, you would have been able to put a significant portion of your savings into long-term certificates of deposit or similar insured investments and be able to make a respectable return. Unfortunately, it’s been a couple years since we’ve seen CDs that pay 5%. You will therefore need to take on a bit more risk in order to grow your savings. In recent months, many large-cap dividend paying stocks have provided a good balance of strong return with relatively low volatility. You can also consider investment-grade bonds and municipal bonds.
  • Choose the Best Savings Vehicle. For long-term savings programs, it’s quite important to maximize your current tax savings. Save in tax advantaged accounts such as an IRA or 401(k) if possible. The tax deferral features of those accounts can add significantly to your nest egg. One surefire way to get a guaranteed return is to take advantage of any employer matching contributions that may be available in your company’s 401(k) program.
  • Save More if Possible. It’s important to understand that this 10% recommendation is only a “floor.” To the extent that you can save more than 10% of your salary each pay period without sacrificing too much, then it’s certainly a good idea to do so. By the same token, if you can currently afford to save only 8-9% of each, then don’t decline to do so because you can’t yet save the full 10%. Save that 8-9% and increase it up to 10% as soon as you’re able. Read my article about Paying Yourself First to learn other strategies how this can work for you.
  • Stay Informed. The amount of money you accumulate in your savings plan can vary greatly, depending on how you save or invest those funds, as well as your income level. After all, you’ll amass a greater savings by saving 10% of a $150,000 salary than you would by saving 10% of a $40,000 salary. Keep track of your savings to monitor your progress and keep on target for your long term goals.
  • It might seem difficult to begin a new savings program where you contribute 10% of each and every pay check. You might even have to change some of your spending habits and behaviors. But you’ll adjust to those changes more easily than you might think, and the long term savings benefits will make those changes well worth it.

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