What Is the 10% Savings Rule?

How To Calculate the 10% Savings Rule

Couple counting their money

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The 10% savings rule is a guideline for how much of your gross income you should set aside for retirement. If you have no idea how much to save, it gives you a starting point, but it isn't a one-size-fits-all rule.

What Is the 10% Savings Rule?

The 10% savings rule is more of a personal commitment than an actual rule. Establishing a personal budget that sets aside 10% of your gross income every paycheck is a way of prioritizing saving.

Investing money in a retirement account is one of the obvious benefits of saving, but the funds you set aside under the 10% rule also can be used to establish an emergency fund, save for a down payment on a home, and more.

Saving 10% of your gross income is committing to a standard higher than what most individuals in the U.S. save. Since the start of the 21st century, the personal savings rate typically has been in the single digits—and that calculation is based only on a percentage of disposal income, not on a percentage of gross income. In other words, average earners in the U.S. typically save less than 10% of their disposable income, which is only what's leftover after taxes have been deducted and necessary bills have been paid. 

How Do You Calculate the 10% Savings Rule?

Figuring out how much to save under the 10% savings rule is about as simple as an equation gets. It's even simpler if you are paid a fixed salary. In that case, your regular paychecks will all be the same, which means you only have to calculate the amount once. If you are paid hourly, your gross pay might vary from paycheck to paycheck. Either way, take your gross earnings—the amount before taxes or other deductions are withheld—and multiply that number by 0.10. This is the same as dividing by 10. For example, if your biweekly paycheck has gross earnings of $1,350, that means you would set aside $135 for savings.

10% savings rule calculation

How the 10% Savings Rule Works

Saving often is about self-discipline. It requires the restraint to set money aside for a stronger future rather than spending it now for something perhaps more frivolous. The sooner you start saving, the greater the impact. Understanding that impact can help with the motivation to save.

For example, the average median personal income in the U.S. at the end of 2019 was about $36,000 annually. This equates to $3,000 per month. If someone following the 10% savings rule began at age 25 and invested all $300 every month in a retirement account earning a modest 5% interest, the balance of the account at age 65 would be $457,806.05. This would include $144,000 worth of contributions and $313,806.05 in interest earnings. The same person waiting until age 30 to start saving would have only $340,827.73 at age 65. In other words, the five years of saving from age 25–30 cost only $18,000 in contributions but earned nearly $100,000 in interest.

Where Should You Save?

If your savings are starting from scratch, it's a good idea to put some of your savings toward an emergency fund. This is money that should be easily accessible to help handle unexpected expenses that may come up. A basic interest-bearing savings account is a good option.

If saving for an expense—such as a house or a wedding—that might be several months or even a few years down the road, CDs might be a good option. They're less accessible than a savings account, but they typically earn more interest.

If your employer matches 401(k) funds up to a certain percentage of your income, count those matching funds as part of your gross income when calculating how much to save. For example, if you earn $36,000 annually and your employer matches up to 3%, that's an additional $1,080 you are receiving from your employer each year, making your gross income for the purposes of the 10% savings rule $37,080.

Standard options for funding retirement include 401(k) accounts or traditional or Roth IRA accounts. One of the benefits of 401(k)s is that they are good for anyone who might struggle with self-discipline since the funds are withheld from your paycheck. Since the money never hits your bank account, you might be less tempted to spend it instead of saving it. In fact, tax laws dissuade you from touching the money by imposing a 10% penalty tax on most withdrawals before age 59½.

When the 10% Savings Rule Doesn't Work

The less you earn, the more difficult it can be to save, especially if you are trying to set aside 10% of your gross pay. For someone just starting out, rent, groceries, and student loan payments can be so much that the 10% rule is an impossible standard to meet. In that case, save as much as possible, making it a goal to pay down debt and increase earnings to the point that 10% is more realistic.

Even someone with high enough earnings to save 10% might want to reconsider their approach if they have a lot of high-interest debt. It's always wise to save something to start compounding interest as soon as possible, but if, for example, you have a lot of credit card with interest rates up around 20%, you might want to commit some of the money you are setting aside to paying down that debt as quickly as possible.

Key Takeaways

  • The 10% savings rule is a simple equation: your gross earnings divided by 10.
  • Money saved can help build a retirement account, establish an emergency fund, or go toward a down payment on a mortgage.
  • Employer-sponsored 401(k)s can help make saving easier.
  • Adjust your savings accordingly if faced with a low income or severe debt, but don't give up entirely.

Article Sources

  1. Bureau of Economic Analysis. "Income & Saving." Accessed Sept. 21, 2020.

  2. Federal Reserve Bank of St. Louis Economic Data. "Personal Saving Rate." Accessed Sept. 21, 2020.

  3. Federal Reserve Bank of St. Louis Economic Data. "Median Personal Income in the United States." Accessed Sept. 21, 2020.

  4. Investor.gov. "Compound Interest Calculator." Accessed Sept. 21, 2020.

  5. Internal Revenue Service. "Exceptions to Tax on Early Withdrawals." Accessed Sept. 21, 2020.