Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers NJAES Cooperative Extension
The 10% Solution takes the math out of saving. And, it makes good financial sense. Simply take your gross pay each period and “drop” the last digit. If monthly gross income is $2,000 per month, save $200. If family income is $60,000 each year, save $6,000 per year or $500 each month. To determine what you need to save, simply determine what 10% of your gross income is on an annual basis and the number of pay periods that you have available to save. For example, if your annual income is $52,000, the annual savings goal is $5,200 (10%) and the required amounts of savings are $100 weekly (52 paychecks), $200 bi-weekly (26 paychecks), $217 semi-monthly (24 paychecks), and $433 monthly (12 paychecks).
The Association for Financial Counseling and Planning Education® and its 800 members are promoting the 10% Solution – a five-year campaign designed to increase the savings rate of Americans to 10%. The percent of income saved by Americans dipped into negative territory in 2005 where it remains today. Simply put, Americans spend more than they earn, financing their spending by depleting savings funds and increasing credit obligations. Like Small Steps to Health and Wealth™, the 10% Solution recognizes that people of average means can build wealth gradually by making small, regular savings deposits.
What can saving do for you? Saving relieves personal stress and improves relationships. Many studies suggest that disagreement over finances is a major reason for marital strife and divorce. And for the unmarried, financial distress is a major factor in general dissatisfaction with life and unhappiness. Studies show that financial stress is not necessarily due to a lack of income but instead is due to unsustainable spending, saving, and investing patterns.
Saving reduces reliance on credit and can save thousands of dollars in interest. The percentage of disposable income used to pay debts is still near record highs. The American Bankers Association reported in 2005 that 43 percent of consumers carry balances each month on their credit cards. Many Americans owe $2,000 or more on their credit card balances, resulting in $45 in interest each and every month at a 15% annual percentage rate (APR) of interest.
Saving helps fund a comfortable retirement. As employers continue to decrease or eliminate pension benefits, private saving is the only remedy for this malady. Social Security benefits will not – nor were they ever intended to -- provide enough income for a sustainable retirement. Saving also increases confidence and the likelihood of getting out of poverty. Persons with even small amounts of savings are more likely to continue saving – even after depleting their savings to zero to meet an emergency.
Saving is habit forming. If saving 10% of your gross income is too daunting, start with 5%. Or 3%. Even small amounts of saving quickly add up. Will 10% of your income be the exact amount that you need to fund future financial goals such as retirement? Probably not, but it’s a great start. To get a more accurate estimate of what you need to save to achieve a specific financial goal, consider using an online financial calculator, such as the American Savings Education Council’s Ballpark Estimate retirement savings calculator at www.asec.org, or hiring a financial advisor to assist you with financial decisions.
Where should your savings go? Consider putting one-half into a retirement plan – 401(k) or (403(b) plan at work, or a traditional IRA or Roth IRA. Save one-third for emergencies – in a savings or money market account. These funds can help pay for unexpected household or auto repairs, medical deductibles, or other unplanned expenditures. Place the remainder (about 17%) in a savings account to fund future goals such as a vacation, roof repairs, or college education.
FAQs
According to this rule, you must save 10% of your income in order to live comfortably during retirement. The truth is that—unless you plan to go abroad after ceasing to work full-time, you will need a substantial nest egg. And saving 10% is probably not enough.
How to calculate 10 percent of your 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 from each paycheck.
How to save 10% of your paycheck? ›
The 10% Solution takes the math out of saving. And, it makes good financial sense. Simply take your gross pay each period and “drop” the last digit. If monthly gross income is $2,000 per month, save $200.
What is the 50 30 20 rule? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Is 10 times your salary enough to retire? ›
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.
What is the 10 percent savings rule? ›
You should consider saving 10 - 15% of your income for retirement. Sound daunting? Don't worry: your employer match, if you have one, counts. If you save 5% of your income and your boss matches another 5%, you've accomplished a 10% savings rate.
What does 10 percent solution mean? ›
10 percent solution means the solute is only 10% in the solution, so taking the volume of the solvent 100 ml then the mass of the solute will be either 10 gram or 10 ml. For example, 10% solution of sodium chloride ($NaCl$) means 10 grams of sodium chloride is mixed in 100 ml of water.
What is 10% of $1000 check? ›
The answer is the same. 10% of 1000 is 100.
What is 10% out of 3000? ›
Multiply 10 by 3000 and divide both sides by 100. Hence, 10% of 3000 is 300.
Do 90% of millionaires make over 100k a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
If you start setting aside just $500 a month for retirement at age 35, the money will still accumulate significantly into your golden years. In fact, by the time you reach 65 (when retirement typically begins), you will have saved over $300,000!
Is saving $1000 a month good? ›
Saving $1,000 per month can be a good sign, as it means you're setting aside money for emergencies and long-term goals. However, if you're ignoring high-interest debt to meet your savings goals, you might want to switch gears and focus on paying off debt first.
How to budget $4000 a month? ›
making $4,000 a month using the 75 10 15 method. 75% goes towards your needs, so use $3,000 towards housing bills, transport, and groceries. 10% goes towards want. So $400 to spend on dining out, entertainment, and hobbies.
How much should rent be of income? ›
Spending around 30% of your income on rent is the golden rule when you're trying to figure out how much you can afford to pay. Spending 30% of your income on rent can help you reach a healthy balance between comfort and affordability. On a median income, 30% should get you an apartment you can truly call home.
How much of your income should you save every month? ›
How much should you save each month? For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.
Is 10% good for savings? ›
Key Takeaways: Setting aside 10% of your gross monthly income is an excellent way to build your savings. Accounts with compounding interest help your savings grow over time.
Is 10% enough for a 401k? ›
As a rule of thumb, experts advise that you save between 10% and 20% of your gross salary toward retirement. That could be in a 401(k) or in another kind of retirement account. No matter where you save it, you want to save as much for retirement as you can while still living comfortably.
Should you save 10% of every paycheck? ›
One popular budgeting method, the 50/30/20 budget, recommends setting aside a total of 20% of your paycheck for your savings goals, including the magnum opus: retirement. Experts say that's a fair rule of thumb.
Is 10 percent a good return on investment? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
