Unless you have a salaried job, your income probably waxes and wanes throughout the year. If you’ve set out to save X amount of money per month (say $500), it can be tough to save the full amount when your take-home pay isn’t quite what it was last month.
In times like these, it’s actually better to save a percentage of your income instead of a set amount. If you know you’ll save 20% of everything you make, you don’t feel as restricted in the months when money is a little tight.
In this article, we’ll dive into the benefits of saving a percentage of your income every month vs. saving a fixed amount. We’ll even uncover some helpful tips on how to choose the perfect saving percentage for you based on your financial goals.
3 Ways Budgeting With A Percentage Saves You More Money In The Long-Run
1. Your Savings Grows With You
When you save based on a fixed amount, you usually stop saving once you’ve reached that amount (even if you could save more). When you save based on percentage, your saving grows with you. As you advance in your career and make more money, you save more money too.
Let’s look at an example.
You’re a 22-year-old fresh out of college and you’re making $30,000 a year. You decide to save 10% of your income, which means you’re stashing away $3,000 a year.
Now let’s fast forward 5 years. You’re 27 years old and your salary has doubled—you’re making $60,000 a year. Because you’ve decided to save 10% of your income, you’re now saving $6,000 a year.
Now let’s pause for a moment. What if you would have set your savings goal to be a fixed amount of $3,000 every year back when you were 22? Do you think you would’ve increased your savings rate yourself when you got your raise? There’s a chance you might have, but the truth is most of us don’t. We’d rather take the easy road and spend the extra cash on things we enjoy (like a new car, a new house, and maybe a jet ski). I mean, we’re already saving, so?
Saving a fixed amount almost always means saving less money in the long-run because you have to manually consider raises and bonuses. But if you save a set percentage every month, the guesswork is taken out of the equation and you foster a habit of saving throughout your entire life.
2. Adjusts In Lean and Plenty Times
We all go through times in our lives where money is tight. Maybe your boss cut back your hours at work or you had to take a pay decrease. Whatever it is, saving a percentage helps you get through it. Instead of beating yourself up about not saving a fixed amount every month, you scale down your expenses and savings to account for your change in income.
Think of it kind of like tithing or tzedakah. In some religions, followers are encouraged to give a percentage of their income to the church and its work (say 10%). The idea is that God (or the community) gets a portion of an individual’s income, no matter how small or how large it may be.
Saving a percentage of your income is a kind of secular tithing if you will. It’s a commitment to save a particular portion of your income first (for yourself and your future) before you pay for expenses.
3. Better for Variable Incomes
If you have a variable income (as we mentioned at the beginning of this article), saving a percentage is the ideal way to go. Many people today work from home, work on commission, have side hustles, and more. As more and more people move away from the traditional salaried 9 to 5 job, income becomes less consistent. As a result, it’s harder to save a fixed amount every month.
With a percentage, however, saving is made easy. Whenever you get a paycheck (no matter how large or small), you save a percentage of it. The dollar amount you save may be less than if you set aside a fixed amount, but you’ll have a steady stream of income to put in your savings account.
How to Figure Out the Right Percentage for You
All right, so you might be thinking, “I’m on board, but how do I know what’s the right percentage for me?” I’ve personally seen all sorts of recommendations across the internet: 10 percent, 15 percent, and even 20 percent.
But here’s my answer: you need to find the amount that works best for you. After all, your financial plan is for you and you only, so it should be written to your benefit.
You need to take into account your personal financial situation, which only you (and perhaps your financial advisor) know. If you have debt to pay down, you’ll likely save a smaller percentage of your income to save compared to someone with no debt.
Similarly, if you just got a raise (or are about to get one), you might be able to keep your same standard of living and save an even larger percentage of your income.
My point is, your financial picture is complex. That’s why I always recommend putting together a financial plan. With a personalized financial plan, you’re able to examine your “here” and “there” to create a roadmap to get you where you want to go in life (in the best way possible for you).
Here are some questions to ask yourself when deciding how much income you should save:
- How much money do you have saved now?
- What is your income?
- How old are you?
- How much are you willing to forego for immediate gratification?
- Are you willing to take on any side jobs?
- Do you have any debt?
- What percentage of your income do you spend on recurring expenses like groceries, housing, and gas?
- How much money do you need to feel financially secure?
Questions like these give you a good idea of how small or large your saving percentage needs to be. Just remember that you can always make adjustments down the road as you earn more money, pay off more debt, and reduce your expenses.
As I noted in an earlier blog post, saving + investing + patience = wealth. If you’re willing to allocate a percentage of your income toward savings, invest it, and be patient, you’ll find yourself wealthy in just a short while.