Saving a certain % of gross income, should it flex with a raise?

[Redraidernurse]

My question is this: You are currently saving 50% of your earnings in different vehicles (IRAs, 529s, Mutual funds, etc) and you experience a salary increase, doubling your current salary. Should you then continue to save 50% of the new current salary or readjust to save a smaller or larger percentage?

(Assume no outstanding debt, etc)

We, of course aren't counting our eggs before they hatch, but it looks like we may be in this situation soon, so I would like to be prepared so we don't go buck wild crazy.

[disneysteve]

I would say that your savings percentage should go up.

Let's say you currently earn $50,000 and save 50% or $25,000. That means you are living on $25,000.
Now you are going to earn $100,000. If you save 50% of that it will be $50,000. That means you would be living on $50,000.

I would propose that you shouldn't double your expenses just because you doubled your income. That's what gets a lot of people into trouble. There is certainly nothing wrong with enjoying the fruits of your labor and improving your lifestyle somewhat but a good chunk of that raise should go to added savings. How much? None of us can answer that for you. Realistically, though, many expenses are pretty fixed. The price of a gallon of gas won't double just because you got a raise. Your internet access won't double. Your electric bill won't double. What you might want to increase is discretionary stuff like dining out, travel, clothing, charitable giving, etc.

[lorraineb]

I think a lot depends on what you income currently is and what it will be. Would you mind sharing that?

[disneysteve]

I think a lot depends on what you income currently is and what it will be. Would you mind sharing that?

I don't think it matters at all. OP said they are debt-free which implies that they are living within their means on their current income, meeting all of their obligations. If they can live fine on this income, they can continue exactly the same on twice as much income even if they don't spend a penny of that added income. Of course, that would be pretty unnecessary at that point which is why I said what I did. Save some of the increased income and spend some. Just don't spend it all.

[~bs]

your focus should be more on the dollar amount of your expenses rather than expenses as a % of income.

[kork13]

I'm personally of the opinion that it's important sometimes to enjoy yourself and whatever income you do make. So my personal policy is to take any raises (which typically come for me at least every 2 years) and increase my savings rate (whatever it may be) by 50% of the raise. The remaining 50% is allotted toward any other spending as desired. That might go toward eating out more, funding my hobbies, guilt-free spending money, or even additional savings or debt reduction. But bottom line, I take half of the raise for savings, and half for whatever else I want to use it on.

So for easy numbers, say I make $5000/mo and save $2000/mo. If I get a raise of $400/mo, I increase my savings to $2200/mo, and get the other $200/mo to use however I like. That way I get to enjoy the boon of the extra income, but I still keep saving as an important focus in managing my money.

[snafu]

It's fabulous that you can save 50% of your income! WOW! If your income has potential for a significant increase you might reward yourself by increasing both saving and spending. Is there something you'd particularly like to buy?

[cooliemae]

I'm personally of the opinion that it's important sometimes to enjoy yourself and whatever income you do make. So my personal policy is to take any raises (which typically come for me at least every 2 years) and increase my savings rate (whatever it may be) by 50% of the raise. The remaining 50% is allotted toward any other spending as desired. That might go toward eating out more, funding my hobbies, guilt-free spending money, or even additional savings or debt reduction. But bottom line, I take half of the raise for savings, and half for whatever else I want to use it on.

I agree, I've always increased the amount we save each time we have received a raise. The increase in savings was not necessary proportionate to the increase in earnings due to other costs that have increased or come into play such as our son's birth!

[Tree0164]

Any time my husband get a raise we do increase our savings. We do similar to a previous poster take 50% of the raise and use that in savings. Some of the savings may go to retirement and some towards emergency or another long term savings.

[Esozh]

Look at the tax implications and do what you can with your investment vehicles to lower your taxes.

I would proportionally increase your budget by the same percentage as your raise, with the exception of your basic budget items like groceries, insurance, car payment, mortgage, etc. Those basic items, the extra funds that would represent their slot on a budget... Save, invest, give. That's all there really is without changing your lifestyle.

[Redraidernurse]

Thank you to everyone that took the time to reply. I read all the replies & they were very helpful.

To answer one responders question, other than saving for a larger home someday there are no big purchases that I foresee.

[MonkeyMama]

I personally would not increase my lifestyle because of a large raise like that. I would be more inclined to speed up "financial independence," just saving the difference. The problem with large income jumps like that is they don't tend to be very long-term. But I mean, it depends. I wouldn't say I have never increased my lifestyle. But there is a point where it doesn't create much more value and happiness, and lengthens how long we will *have to* work. If you are living extremely meagerly, it might be fair to just keep saving 50%. (50% is not a bad savings rate, for sure, and you would be saving twice as much). But, I would not increase my lifestyle substantially (or really at all) if I was in that position, personally. OF course, like some of the others have said, we have capped our "monthly/regular expenses" BUT are more open to one-time splurges that don't have ongoing costs. This means we will be more likely to splurge on toys or vacations than buy a bigger house, nicer cars, and paying for services like cable.

One thing that I did not seem mentioned... Higher income will come with potentially significant taxes. So, I wouldn't get too excited about it and make too many financial plans until you know the *real* financial impact. It could be difficult to continue your 50% savings rate if your income taxes skyrocket.

[LivingAlmostLarge]

Depends. Is the income doubling because you were a single income family and now dual income family? Or you were paying daycare and now it's over? Because perhaps if one person was in school and now working it'll be hard to have the same lifestyle because now moving is an option. Moving closer to work, etc.

I like the general rule of thumb saving half and spending half of the raise.

[Redraidernurse]

Depends. Is the income doubling because you were a single income family and now dual income family? Or you were paying daycare and now it's over? Because perhaps if one person was in school and now working it'll be hard to have the same lifestyle because now moving is an option. Moving closer to work, etc.

I like the general rule of thumb saving half and spending half of the raise.

Still remaining a single family income, no daycare involved.

[Redraidernurse]

One thing that I did not seem mentioned... Higher income will come with potentially significant taxes. So, I wouldn't get too excited about it and make too many financial plans until you know the *real* financial impact. It could be difficult to continue your 50% savings rate if your income taxes skyrocket.

This is very true and something we need to look into further. I know many of my family members who were making very high incomes and have decided to scale back because it's not worth it to work like a dog to have so much of it taken away.