How to divide up savings if you can't save 20%

[disneysteve]

We often throw out the advice to save 20% of income, 15% for retirement and 5% for other needs. What about if you can't yet afford to save 20%? Let's say you can only afford 8% or 12%. How should that be divided up? You can't put it all toward retirement and leave no savings for other needs like your next car or vacation or home repairs. Would you use the ratio of 75/25 with 75% going to retirement and 25% going to other things? Or would you split it up some other way?

[creditcardfree]

Personally, I would lean towards being top heavy in retirement savings, such as 80-85% of the amount I'm able to save each month. I probably feel this way since we have an emergency fund. I might flip flop it for someone without one.

[jIM_Ohio]

We often throw out the advice to save 20% of income, 15% for retirement and 5% for other needs. What about if you can't yet afford to save 20%? Let's say you can only afford 8% or 12%. How should that be divided up? You can't put it all toward retirement and leave no savings for other needs like your next car or vacation or home repairs. Would you use the ratio of 75/25 with 75% going to retirement and 25% going to other things? Or would you split it up some other way?

LOL

if a person cannot save 20%, there are so close to living paycheck to paycheck, not sure if it matters.

I would suggest in this regard

1) 401k up to match is automatic (get the free money). This is usually 6% of gross being saved.
2) emergency fund fully funded to 3 months expenses
3) then all contributions to retirement until it hits 15% of gross pay


If a person saves 6% of what they make, it will take 15 years to set aside 1 years expenses.

6% implies they live on 94% of gross pay
6%*15 years is 90%.

That is not retirement planning, that is "hoping" the starts align before the age of 80 to retire, or a big belief social security really is enough money to live on.

IMO at 6% success comes from luck, as few people will have the patience to work 45 years to set aside 3 years worth of expenses.


At 10% savings, its not much better...
means you live on 90% of gross
and every 9 years you set aside 1 years expenses. After 45 years you will have 5 years expenses invested.

At 15% savings, spending 80% of gross, it takes 5 years to set aside 1 years expenses. This is where investing "starts" to do the heavy lifting. In 45 years 9X expenses will be invested.

At 33% savings, spending 66% of gross, it takes 2 years to set aside 1 year of living expenses. In 45 years, you will have 22X expenses invested.


**when I state in A years you will have BX expenses invested, most people grasp that a dollar early in retirement is 16X in a retirement account (because of compounding). I point this out because if a person is conservative with money (less equities, aversion to debt), most of their retirement account assets will come from deposits, not earnings. meaning instead of 16X it might be 8X or 10X on the deposits.

[disneysteve]

if a person cannot save 20%, there are so close to living paycheck to paycheck, not sure if it matters.

When my wife and I were just starting out, we weren't saving anywhere close to 20%. I had over 100K in student loans and that was in 1993 when that was a lot of money . As I recall, we were saving 6% of take-home pay, not even 6% of gross. We lived very frugally but every spare penny was going to repay the student loans. We also saved up a 20% down payment for our house (actually, we saved about 13% and family helped with the rest). I would not say that we were living paycheck to paycheck, at least not as I define that term. As my income rose and we chipped away at debts, we gradually increased that savings rate to 6% of gross, then 8% then 10%. We are now at about 24% or somewhere around there but it took a while to reach that point due to other financial demands.

Do you think it makes sense for someone to put all available savings money into retirement and not be setting anything aside for other needs like a car or a home or other shorter term stuff besides retirement?

[Guest]

Do you think it makes sense for someone to put all available savings money into retirement and not be setting anything aside for other needs like a car or a home or other shorter term stuff besides retirement?

I do not think we can afford NOT to save for a car or other larger items. While both of our cars are currently paid off, they also both have 125,000+ miles on each. It is inevitable that we will need at least one car in the near future.

We also just finished paying off all debt besides our house. So we are in the process of deciding (learning) where to focus our savings efforts. Looking forward to the responses in this thread to help guide me.

[jIM_Ohio]

When my wife and I were just starting out, we weren't saving anywhere close to 20%. I had over 100K in student loans and that was in 1993 when that was a lot of money . As I recall, we were saving 6% of take-home pay, not even 6% of gross. We lived very frugally but every spare penny was going to repay the student loans. We also saved up a 20% down payment for our house (actually, we saved about 13% and family helped with the rest). I would not say that we were living paycheck to paycheck, at least not as I define that term. As my income rose and we chipped away at debts, we gradually increased that savings rate to 6% of gross, then 8% then 10%. We are now at about 24% or somewhere around there but it took a while to reach that point due to other financial demands.

Do you think it makes sense for someone to put all available savings money into retirement and not be setting anything aside for other needs like a car or a home or other shorter term stuff besides retirement?

Steve distinguish between the savings rate and the rate a person lives on.

IN GENERAL if a person is saving 6% they are spending 94%

however in your situation it could probably be argued you were saving 20% and spending 80%
you directed 6% to retirement
and 14% to shorter term goals (like student loan repayment and house downpayment)

both are forms of savings.

You were living on 80% or less of what you grossed- that was the key to your success (right??) because once those line items were off the budget, your retirement savings and other things were increased (spending on needs probably only increased slightly??).


So if a person can only "save" 6%, I want to question where the other 94% goes- it is is spending, it needs to be cut back. If it is going to debt repayment not called a mortgage, might be considered savings to a lesser degree-

need 2 ratios defined

retirement front end- % of gross income to retirement
spending back end- what % of gross is spent as general spending?

6% front end is OK if back end is 80% or less
15% front end is not OK if back end is 90% or higher (in this case 15%+90%=105% so spending is higher than income).

[disneysteve]

Jim, I understand and agree with all of that. Paying off debt is a form of savings, especially when paying more than the minimum since it saves you in interest costs. That still doesn't really answer the question, though.

When I was only able to save 6%, to use my own example, how should I have divided that up? Should I have put it all toward retirement and set nothing aside for other needs, like the next car? How does one decide? When you are saving 20%, we all agree on 15% for retirement and 5% for other but what you do when you aren't able to save 20%? If you put it all to retirement, you may be in trouble. OP has 2 high mileage cars. Shouldn't he be saving something toward a car fund, even if it means less is going toward retirement right now?

[am_vanquish]

I would suggest in this regard

1) 401k up to match is automatic (get the free money). This is usually 6% of gross being saved.
2) emergency fund fully funded to 3 months expenses
3) then all contributions to retirement until it hits 15% of gross pay

I think this is a great starting point or rule of thumb. Perhaps a more flexible plan could be as follows:

If EF is less than 3 months:
1) 401k up to match is automatic (get the free money).
2) 100% of remaining goes to EF.

If EF is more than 3 months but less than 6 months:
1) 401k up to match is automatic (get the free money).
2) 75% of remaining goes to EF.
3) 25% of remaining goes to Retirement.

If EF is more than 6 months but less than 9 months:
1) 401k up to match is automatic (get the free money).
2) 50% of remaining goes to EF.
3) 50% of remaining goes to Retirement.

If EF is more than 9 months but less than 12 months:
1) 401k up to match is automatic (get the free money).
2) 25% of remaining goes to EF.
3) 75% remaining goes to Retirement.

If EF is more than 12 months:
1) 401k up to match is automatic (get the free money).
2) 100% of remaining goes to Retirement.
-------------------------------------------
Unfortunately, the real answer is "it depends on the individual situation." If there's no employer match, that might change things. Also, the answer would change greatly for a recent college grad with student vs. a 45 year-old with credit-card debt, a mortgage, and no retirement savings who is finally "seeing the light."

[Beppington]

DisneySteve ... You don't ask questions, you answer them!! (usually anyway )

Anyway ... why not follow your same allocation? You said that of your 20% desired savings rate you'd put 15% in retirement and 5% for other needs, which is a 3 to 1 ratio aka 75% / 25%. No matter how much you save, in dollars or precentages, put 75% in retirement & 25% in the other needs category.

[Guest]

I think this is a great starting point or rule of thumb. Perhaps a more flexible plan could be as follows:

If EF is less than 3 months:
1) 401k up to match is automatic (get the free money).
2) 100% of remaining goes to EF.

If EF is more than 3 months but less than 6 months:
1) 401k up to match is automatic (get the free money).
2) 75% of remaining goes to EF.
3) 25% of remaining goes to Retirement.

If EF is more than 6 months but less than 9 months:
1) 401k up to match is automatic (get the free money).
2) 50% of remaining goes to EF.
3) 50% of remaining goes to Retirement.

If EF is more than 9 months but less than 12 months:
1) 401k up to match is automatic (get the free money).
2) 25% of remaining goes to EF.
3) 75% remaining goes to Retirement.

If EF is more than 12 months:
1) 401k up to match is automatic (get the free money).
2) 100% of remaining goes to Retirement.
-------------------------------------------
Unfortunately, the real answer is "it depends on the individual situation." If there's no employer match, that might change things. Also, the answer would change greatly for a recent college grad with student vs. a 45 year-old with credit-card debt, a mortgage, and no retirement savings who is finally "seeing the light."

So no "General" savings bucket? eg. You are looking to move in 3-5 years, new cars etc?

[buildmybudget]

If you don't save for the short term and only funnel savings into retirement, I would say you're only setting yourself up for failure. If you need to access your cash in the case of an emergency, you'll pay penalties to pull it out of a retirement vehicle. Frugal45, I like your schedule.

[Joan.of.the.Arch]

Honestly, I am going to say that there are people out there who cannot afford to save for retirement [yet]. Yep: Black & white: cannot afford to save for retirement. I am thinking right now of people who are just beginning their work life, who have no means of support besides their own low wage work, who have no 401K or other plan offered through their work, who perhaps do not even own a car, whose housing, though they may live in an urban or rural hell-hole, costs them a large portion of their wages, who may be eligible for foodstamps, who may be 17- 21 years old.... Go ahead and finish out the bleakest picture in your own mind.

Anyway, there are people who live so close to the bone that it is very unlikely they can presently save beyond what sustains them for the month, plus maybe a few dollars to stash away toward the purchase of a bicycle (forget a car). The closer one is to that kind of scenario, the less likely they would be able to save for retirement/old age. Getting to the point where they can save for something other than tomorrow's (or next month's) need is a goal to work toward. The further away from that bleak scenario one gets, the more likely one can actually set aside some little bit for retirement.

I don't mean to be contrary. I'm just feeling aware of how little some people start off with in their first years. Thus there could be someone who is able to not spend 6% of her check, yet I would not be telling her to put it in a retirement account. I might be telling her to save it for uniforms and school supplies she will need for the community college nursing school, or for a bus ticket to another town go move in with her sister who says there is better work there.

[creditcardfree]

Honestly, I am going to say that there are people out there who cannot afford to save for retirement [yet]. Yep: Black & white: cannot afford to save for retirement. I am thinking right now of people who are just beginning their work life, who have no means of support besides their own low wage work, who have no 401K or other plan offered through their work, who perhaps do not even own a car, whose housing, though they may live in an urban or rural hell-hole, costs them a large portion of their wages, who may be eligible for foodstamps, who may be 17- 21 years old.... Go ahead and finish out the bleakest picture in your own mind.

Anyway, there are people who live so close to the bone that it is very unlikely they can presently save beyond what sustains them for the month, plus maybe a few dollars to stash away toward the purchase of a bicycle (forget a car). The closer one is to that kind of scenario, the less likely they would be able to save for retirement/old age. Getting to the point where they can save for something other than tomorrow's (or next month's) need is a goal to work toward. The further away from that bleak scenario one gets, the more likely one can actually set aside some little bit for retirement.

I don't mean to be contrary. I'm just feeling aware of how little some people start off with in their first years. Thus there could be someone who is able to not spend 6% of her check, yet I would not be telling her to put it in a retirement account. I might be telling her to save it for uniforms and school supplies she will need for the community college nursing school, or for a bus ticket to another town go move in with her sister who says there is better work there.

Well said. There are many people in this country in this situation.

[Guest]

So doing the numbers tonight, I THINK we have roughly 10-12% we can save right now (could be more). I just checked our 403b/401k docs and it looks like my wife's company contributes 3% of her income period whether she contributes or not. Then they match 50% up to 6% (I think I said 10 earlier but was incorrect). So we are going to put 6% in her 403b to get the match, plus her employee will be matching 50% of that and depositing 3% on top of that.

My employer does no matching whatsoever.

So this is actually only about 3% of our total income that we are contributing. (We both make the same amount). Where should the other ~7-9% go? Assuming we can afford 9 more percent I would think we should put the rest in to starting an EF. After that is maxed out, get 10% into retirement and the other ~2% into a general savings bucket.

What do you think?

[creditcardfree]

So this is actually only about 3% of our total income that we are contributing. (We both make the same amount). Where should the other ~7-9% go? Assuming we can afford 9 more percent I would think we should put the rest in to starting an EF. After that is maxed out, get 10% into retirement and the other ~2% into a general savings bucket.

What do you think?

I think that is a great idea, especially if you don't have an EF. Get it together quickly so you can start adding more to retirement!