My Definition of the 10% Rule April 20, 2006
Books, financial advisers, personal finance blogs often suggests that earners save 10% of what they earn. Since the US national savings rate is in the negative territory now, in the consumerism society of the USA, how is it that everyone expects America to save 10%? I’ve always wondered about that 10% number. None of the publications I’ve read were that clear on whether that 10% is pre-tax or after-tax or is it 10% of your disposable income. I know it doesn’t really matter, because either way, saving something is better than spending more than you earn. But it can make a difference. For example, the difference between my pre-tax savings of 10% and after-tax savings of 10% is approximately $5000.
Does saving on your 401k retirement count towards your savings? I’ve always trained my mind that anything put into my 401k is just money never seen. I don’t count it towards savings, net worth, etc. So when I do get to see it someday, it’ll be found money. So in my book, when people say we should save at least 10% of our salary, I see it as 10% of my after-tax, discretionary money. I’ve been able to do that without any major lifestyle changes by changing small habits, and reducing my fixed costs. From a MSN Money article, the savings picture in the US is pretty bleak:
In 1981, families saved an average of 11% and owed 4% of their income on credit cards. By 2000, the average savings rate had already fallen below zero, and credit-card debt had gone up to 12% of income. Today, she says, “boomers have a bigger problem with debt than anyone else. Half of them do not have a retirement account.”
In the same article, I agree with the quote by Jeff Seely, CEO of ShareBuilder.com, “Do not let people borrow against their 401(k). This is your retirement money. Don’t touch it.” That’s partly why I don’t even count that as my savings, because I don’t intend to touch it until I retire.
Do you count your 10% savings after-tax? Does retirement count? Inquiring minds want to know.
Source:
Why can’t Americans save a dime?
MSN Money