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
- Posted in : Living Below Your Means, Retirement, Savings
- Author : Kyle
Comments
Hi Kyle, thanks for stopping by earlier on my site… I actually think 10% includes all of your savings such as 401K, Roth IRA, and non-retirement investments. The only thing that doesn’t count (but is part of your money) is the equity you put into your house.
It’s shocking to see that our national saving rate dropped to below zero. That’s really sad… With social security going belly up, pensions dissapering, how the heck do people expect to have a retriement? they will have to work until the day they die! That’s scary…
Like you said, saving 10% isnt that hard.. Just have to set up an auto withdraw and forget about it…
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