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I love numbers. I love to break them down, work them out and come up with awesome uses from math. But I have a LOVE/HATE relationship with percentages. Sometime I find them very useful in laying out the data I’m looking at. But other times I find them deceptive, and don’t really trust what they are telling me. To quote the movie Anchorman, “60% of the time, it works, EVERYTIME.”
But when percentages are useful, they can help us see what we couldn’t see before and set goals to improve the percentage to get where we want to be. So today I want to look at the percentage of income you are using to live on, and come up with some ways to improve that percentage. Some of you might be encouraged, some might be depressed, but we can all take an honest look at where we are and move forward with a purpose once we expose that number.
What Percentage Of Take-Home Pay Are You Using To Live?
Since I can’t call any of you on the phone right now (it’s like 12:15am), I can only start by talking about the percentage of take-home pay we are using to live. And it might shock some of you. We are currently using 100% of our take-home pay to live. Yup. After tax, we are currently saving no extra money, and are living on all the income we make. I’ll be honest, sometimes it sucks. But for our current situation, it’s necessary.
As I’ve mentioned in the past, we barely make enough to get by, as one of the sacrifices we are making to allow Michelle to be at home with our kid (soon to be kids!). We would have it no other way, but it means that things are a bit tight at the iHB household. To keep from going insane, we do budget in a little spending cash, and are lucky enough to have figured out travel hacking, allow us to travel and vacation for free using credit card rewards. But other than that, things are pretty tame around here. Our budget has kept us in a good spot, and online and tax season income has allowed us to even make some strides in paying down our student loans.
I am maxing out my 401k match at the moment (6% pretax), as I don’t want to miss out on the company match (FREE MONEY!) and the long term growth opportunity of investing at an early age. But I would definitely like to change my percentage to something a bit lower. If I could even invest 5% into my Roth IRA, I would start building my retirement at a MUCH faster pace, and make my journey toward financial independence double in speed! But that money isn’t going to save itself, I need to set some goals!
So, what percentage are you using? Do you spend it all to live, or save a chunk every month? Are you saving so much pre-tax income that you don’t need to save any more?
Well….Set Some Goals!
Since it’s still really late and I still can’t call you to ask the above questions, let’s assume you’re saving some, but maybe not as much as you would have hoped. Maybe you save 8% of your take-home pay, but you know your household expenses are not 92% of your take-home pay! What are you going to do? Set some goals of course. And around here, we achieve goals by looking at the end and working our way backwards. So here’s an example of how to use these percentages to set some awesome goals.
- Figure out your monthly household expenses. Ummmm…if you’re reading this blog, this is the easy part. JUST START A BUDGET! If you haven’t yet, you can go over my 5-post budgeting basics series and get yourself hooked up! I mean, everyone else is doing it, and budgets are sexy these days, so get on it! Then hop on over to my post on how to setup a budget with Mint.com. Easy peasy!
- Figure out your take-home pay. I know, I know, this should be easy. But for some, your pay goes up and down like a rollercoaster, and figuring it out can be a challenge. So this is how to do it. If you’re paid bi-weekly, two checks is your take-home pay. If you have multiple streams of income, take your last 6 months of income, and use the LOWEST NUMBER. If your paid monthly…well…..I can’t help you.
- Figure out your percentage. Here’s the math:
- MAKE IT HAPPEN! Now that you know what your monthly percentage COULD BE, make it so! If your formula dictates that you could be saving 20% of your take-home pay, and you’re still at 8%, then you need a budget check-up. Go through your spending and cut the crap out of it, so you can now use your extra money for something more useful. And if you still aren’t motivated, take that extra 12% you are saving and throw the numbers into a retirement calculator over the next 30 years at 8% average. Motivated yet?
As always, I encourage people to figure out their priorities before setting goals, because how the heck do you know what you want if you can’t spell out what’s important to you?! Then you can take a lesson from my 13-year-old cousin on setting goals.
So, since I am writing a blog on budgeting and saving, and am doing a pretty horrible job on the latter, I need to set a challenge and walk the walk here. I said above that I would love to start saving at least 5% of my take-home pay to accelerate my retirement savings. So I am now challenging myself to hit that goal, starting in the month of October (September is already screwed, dangit!). I will save 5% of my take home pay, and drop it straight into my Roth IRA. BOOM! (and I’ll be honest, this is going to require some sacrifice).
So, whaddya say? Want to join me here? Can you increase your savings by a small (or large) percentage starting next month? Can you make some choices to help cut the junk out of your monthly spending and start living like a frugal rock star?
65 thoughts on “What’s Your Percentage?”
Jacob, I can’t help but question the logic that says socking away money into an IRA builds FI twice as fast. My opinion is that since you can’t touch that IRA money until you’re 59 1/2 years old, all you’re doing is creating a more LUXURIOUS retirement, not making it come sooner. Defining how much is enough will tell you how much you need in order to live in retirement, then you can set the date yourself! Just my two cents. Great post though, having a budget and saving money are your biggest keys to making it to FI either way!
I think Jake’s putting the money into a Roth IRA, so he could–not that I’m recommending it–withdraw contributions (not gains and earnings) anytime without paying tax, penalty or otherwise.
Good luck with your goal in Oct Jake! Please tell us about the sacrifices made that helped you reach it, that will be especially interesting I think.
^ what Kurt said. Also, Rule of 72(t) 🙂
And great idea, Kurt. I’ll try to document how we made it happen 🙂 (like how I’m predicting the future here?!)
Thanks for the feedback. I like funding my Roth, because principal is available as a backup emergency fund without penalty or tax. Also, I’ll be using the Rule of 72(t) if FI comes before 59.5. We’ll see 🙂
Don’t forget, if you separate from an employer at 55 or older, the 401(k) withdrawals are without penalty. So as you get closer, with a bit of planning, 55, not 59.5 is the magic number.
Good call. I bet they have enough non-retirement savings to bridge the gap too.
Our savings rate has been relatively high for a while now, although it went down a little this summer while Greg was basically unemployed for three months. He started his new job today and I’m ready to start seeing those paychecks again! =)
MAKE MONEY MONEY MAKE MONEY MONEY MONAAYYYY!!!!
We have been saving a good amount each month lately. However, our savings will most likely drop by a little soon since I am leaving my day job. But hopefully I will gain that back!
WHA?! Heck yes! Congrats. Also, just keep killin’ it, you’ll definitely gain that back 🙂
DINKs FTW? We typically save over 50% of our take home over the course of the year, which is nice because it means that if mini-PoPs were to happen, one of us could stay home without creating hardship spending-wise.
Nice work! I know you guys are going to retire pretty early, which is awesome! I think my brother-in-law has a similar plan to you guys, plus a bunch of rentals.
My income is too variable on a monthly basis to really have % targets, so I focus on the $ of the expenses. Even if my savings rate takes a hit due to the income side, I still count it as a win if my expenses were in line or lower than the previous month.
When income is crazy, the only thing you can REALLY control is expenses. Definitely a win when they go down 🙂
We don’t live on 100% of our income, but we use all of it because we’re working on paying down Tori’s student loan debt… it will eventually be gone one day.
Heck yeah. What percentage are you putting towards the loans currently?
It depends on the month, but a lot 🙂
My current savings is 6%. This is just for general savings though, emergency, etc. Retirement (pre-tax) is another 20% (plus a 4% match!) and then I pay about 22% towards my student loans. I consider this “savings” because it is cutting down on interest and increasing my net worth.
Those are great percentages! Especially once the debt is gone, you’ll be saving almost 50% overall! BALLIN!
I save about 40% of my take home salary, which is great, but I’m hoping to move that number up to 50% so I can quit my job eventually! I also don’t have any kids yet so it’s much easier for me to save now.
Nice work Connie! 40% is pretty incredible. I tried getting my younger brother to save that amount, and didn’t work out. Maybe you have some advice for him to motivate him to save more?
When I was still working (along with my wife), we lived on around 25% of our salaries. Almost all the rest went to savings (minus a modest amount for taxes). I’m retired now, but Mrs. RootofGood still works (for a little while longer). We only spend about 60% of her paycheck, and save the rest.
Our hard core savings has worked out pretty well for us, and allowed us to amass a pretty decent sized portfolio, and allowed me to retire at age 33.
Baller. That is all I can say. You can teach the class now 🙂 WELL DONE!
We stuck to that rule about not increasing your lifestyle as you get raises. Save them instead. We have even raised 3 kids while saving that much. So it can be done if you pay attention.
It’s a great rule. I think we’re at that point, where our spending is pretty set, and if more income comes our way, we can sock it all away. Nice work on sacrificing to live the dream!
You’re doing fine. You are. You and your wife are thinking – that alone puts you way ahead of the pack. When we were your age, we didn’t have a dime to save other than what we “thought” we had to have deducted from our checks(seriously, we really thought 401 k contributions were mandatory – ha! We were morons, but I’m now glad we were).
We had school loans, a car loan, a mortgage, little kids we were raising. At the time we didn’t really fully appreciate all the balls we were juggling. Looking back at it now – I’m frankly really impressed with young people who are raising babies and juggling sooooooooooooooo many things. You and yours are going to be absolutely fine.
I suspect you’re a bit of a perfectionist (and with that comes impatience). Takes one to know one. Lighten up on yourself – at least just a tad. You’re doing great and your family is, and will continue to be just fine.
Thanks Jim. I am definitely a bit of a perfectionist, annoys the heck outta my wife! When I see others saving more than I do, I get motivated to save even more. But you’re right, we’re in a season of life where I can’t do EVERYTHING, and I need to be ok with that.
We are very close to living on one income and saving the other, which has been a goal for a while. Actually before we save all of it, we’ll pay off what debt we have then sock it all away in investments.
When we were DINKS, we lived on my income, were able to save $300 of it, and save all Michelle’s income. Now we live on my income from multiple jobs, and are definitely tight. Hoping to get back to the 50% mark in the next 5 years. HUSTLE HUSTLE HUSTLE!
I was in your shoes when I bought my house. I bought too big of a house and was barely getting by. I made it a point to keep my 401k contributions going since I too received a match. But other than that, I was saving zero.
Keep pushing forward as things will get better. You just have to stay focused on the goal and positive!
Thanks Jon. I need all the encouragement I can get!
Our expenses are currently about 68% of our income. But some of that is purely discretionary (like saving for travel) and our “emergency” spending is more like 55% of our income. One way we’d like to increase savings is by increasing some of the income my wife makes in her part-time work. But those little kids keep being born, so that might have to wait a little bit, haha.
Those kids, they come outta nowhere! LoL. That’s a pretty awesome savings rate. I’d love to be there in a few years!
We spend a good percentage of our take home pay as well.. but things certainly got much easier once we didn’t have debt repayments eating into that amount!
We’ll get back about $217 per month once the student loans are gone. Not a ton, but that’s a decent chunk that we can send toward savings 🙂
We have a goal of spending 50% of take home pay. Through the first 6 months of the year, we came in at around 45%, which is great, but I would love those last 5% just to be able to say I did it. Right now, we have relatively few responsibilities (we own both our cars outright – ~90,000 miles each, no kids yet, student loans are at low interest rates), but we know that when we buy a house and have kids, that rate will likely drop.
Dude, baller. It seems like everyone here is rocking their savings MUCH better than we are. Definitely motivating me!
Interestingly, I had never calculated this. For 2013, the answer appears to be that we spend 91% (85% in ’12, 79% in ’11, and 74% in ’10) . This includes real estate taxes and home owner’s insurance amortized to a monthly figure. It also includes maxing out 2 Roths. If I exclude the Roths from spending then that takes us to 76%. Unfortunately, it looks like this % is going the wrong damn way for me.
Our percentage was about 45% when we were DINKS. Throw in a big house payment and 1.5 kids. 100%. But think of it as a hill. We’re at the hump, and it’s all downhill (in a good way) from here 🙂
The rough break down in my household is that we spend about 78% and save/invest 22%.
Nice work. 22% is a great number. That after tax?
My goal is to save 50% of my income this year. I’m on track to do that. It would be tough to do much more, but saving this much hasn’t been that hard. I don’t feel like I’m sacrificing much, if anything.
Dude, you are the king of frugal. Nice work on the 50% 🙂 Only 3 months left
I’m not doing a terrific job either. I think I’m saving about 2% of my take home pay (maybe 3), but that’s because we’re paying off some debt. By next summer, that savings amount should increase to quite a bit more as the debt payments can be applied to savings. I’d love to join the 5% movement, but not until next summer. ;(
How much is going towards debt right now?
I’m saving practically nothing right now, but that’ll change once all of my high-interest CC debt is gone! I’m with you on this!
Heck yes! When is your projected date?
Right now we are saving about 31% our income, not including the 401k contributions that come directly out of my husband’s paycheck (DINKS). We are able to save about 20% of my husband’s income and all of mine from my part-time job. This excludes tithing 10% to our church.
We are not homeowners yet, but are hoping to be in the semi-near future, which might bring our savings rate down a bit. We live in Seattle too and it’s expensive here. Most of our non-retirement savings right now is going towards our adoption fund. Once we have a child in our home, I will likely be a stay-at-home mom or work very part-time, which will obviously mean saving less.
Also, I think you are doing fine! In a lean time, yes, but as long as you aren’t going into debt and believe you will be able to save more in the foreseeable future, I think you are in a good spot.
I might add that we also try and save any extra that comes through overtime, babysitting jobs, gift money, etc.
We did that a bunch back when we lived in Oregon. Really added up!
Very very cool on the adoption fund. Definitely costly, but hopefully can be offset a bit by the tax benefit.
31% is great, and it sounds like 20% is even when you’re not working, so that’s awesome.
And thanks for the encouragement, it feels lean, but we’re not drowning 🙂
I am a 50% man – 50% on expenses
35% on servicing and paying off debts.
And a measly 15% on my day to day needs.
Nice work. 50% is where I’d love to be someday, but I’d probably get tired of that quickly and buy a rental or two 😉
We’re also somewhere in the middle, living off of 60% (which includes a small contribution to my Roth IRA and Jon’s automatic 401k that comes from his paycheck) and then the rest is being used to pay off student loans as quickly as possible. Once those loans are paid off we probably won’t know what to do with ourselves… do a happy dance and then focus on the next big thing. Adoption.
Nice. 2nd couple looking at adoption. That’s an amazing goal, all the best to you both! 40% onto your loans is ROCKING! Nice work 🙂
Sometime ago Dave Ramsey had a woman on his show who wrote a book on how to adopt a child and not go broke in the process. Two different family members’ families have adopted children. One family did it without incurring much expense. The other family spent thousands of $ doing it. You might want to google that. Best of luck.
That book was probably Adopt Without Debt by Julie Gumm. Great resource that I would highly recommend.
Yes – that is exactly the author/book I was referring to. Sounds like you’re already on top of it. Good for you. Best of luck.
Adopt without debt by Julie Gumm. See Hannah’s comments. Best of luck!
My goal is to save 100% of my passive income while I build out my online business. It’s fun to separate the income streams to make sure that not all is lost if one project fails!
You’ve really got an epic setup which allows you to bring in a VERY LARGE amount of passive income, but saving it all help you stay motivated to keep hustling online.
We’re self-employed, so the percentages vary based on good months and bad months. But based on our general minimum of $8000 a month including rental income and our budget (no crazy pop up expenses like cars or dental), it’s 42% to living expenses, 42% for income and property taxes, and 16% to savings and investments. If it’s a better than $8000 month, all of the extra goes to savings and investments too.
Nice work. 16% is a solid number, and one I hope to get to by next year sometime.
I’m on this with you. I’m definitely (always) making plans to save more. Keep us posted on your updates. Looking forward to that.
Definitely will. Already seeing roadblocks, just gotta get past ’em!