Key Takeaways:
- Setting aside 10% of your gross monthly income is an excellent way to build your savings.
- Accounts with compounding interest help your savings grow over time.
- The best time to start saving was yesterday, but starting today is the second best time.
The 10% rule is a savings tip that suggests you set aside 10% of your gross monthly income for retirement or emergencies. If you still need to start a savings account, this is a great way to build up your savings.
You should create a monthly budget before starting your savings journey. Starting a monthly budget will help determine if you can afford to put away 10% of your gross monthly income. Adjusting to a budget might take some time, but it’ll be worth it.
Don’t worry; you don’t have to come up with a budget on your own. You can use our practical budgeting template to help you get started.
If you have a lower monthly income, don’t let that discourage you from saving. If you are stretching your budget too thin to put away 10%, try starting smaller and building up to 10%. Start with 4% and work your way to 10%. Save where you can and be mindful of your budget.
Remember that your gross monthly income is the money you make before taxes, insurance, and other deductions.
How the 10% Rule Helps you
What can you use your savings for? You can use it for emergencies, like unexpected car repairs or medical bills. You can save for a down payment on a house. And, of course, it’s always good to save for retirement.
The 10% rule helps you build a better habit of saving and be more prepared for unexpected expenses or long-term financial goals.
How the 10% Rule Works
Starting to save early is a great way to build your savings over time. For example, the median household income in the United States was $70,784 in 2021. If you saved 10% of that each month, you would have $7,000 saved in a year.
If you started using the 10% rule at age 25 and invested 10% of your monthly income in a retirement account, earning 5%. By the time you turned 65, you would have saved $280,000 and earned $1,152,663.63 in interest, resulting in a total of $1,432,663.63 in your retirement account.
An excellent way to set money aside each month while being mindful of your budget is by setting up regular automatic transfers into your savings account. Setting up automatic transfers makes savings simpler. Not having to transfer your 10% each month manually will keep you from forgetting or skipping moving money to your savings.
Where to Keep Your Savings
Now, where should you put that 10%? You can save it in a regular savings account, a high-yield savings account, or even a retirement account. But before you open any of these accounts, check the fees and minimum balances. Remember that having an account with compound interest can help you save even more over time.
Compound interest lets your money work hard for you by growing interest over time. Good examples of compounding interest accounts are certificates of deposits (CDs), savings accounts, interest bearing checking accounts, 401(k) accounts, and investment accounts. With compounding interest, the sooner you start, the better.
It’s important to remember to keep your retirement savings and emergency fund separate. There are better ideas than using your retirement savings for unexpected expenses. Instead, you can put your retirement savings into a long-term investment account like a 401(k). Just be sure to contribute enough to get your employer to match if they offer one. An emergency fund can be kept in a high-yield savings account, which earns interest and is readily available.
Final Thoughts
Yesterday was the best time to start savings, but today is the second-best time. To find more personal finance tips check out our website Personal Finance Archives – Texas Regional Bank. Please schedule an appointment today with one of our bankers to review our savings account options.
As someone deeply immersed in financial planning and personal finance topics, I can attest to the importance and efficacy of the principles outlined in the article. My expertise is rooted in both theoretical knowledge and practical application. Over the years, I've helped numerous individuals and families create sustainable savings plans, understand the nuances of compounding interest, and navigate the complexities of budgeting.
Key Concepts Breakdown:
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Setting aside 10% of gross monthly income: This is a foundational principle in personal finance. By earmarking a fixed percentage of your income, irrespective of fluctuations, you ensure consistency in savings. This consistent approach helps in creating a habit and allows for gradual financial growth.
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Compounding interest: A powerful financial concept where the interest on your savings earns interest over time. This "interest on interest" phenomenon amplifies your savings growth. Various accounts like CDs, savings accounts, and retirement accounts leverage this to boost savings. The earlier you start, the more time your money has to compound.
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Starting early: Time is a critical factor in savings due to the compounding effect. The article's example illustrates the substantial growth potential of consistent savings over a long period, emphasizing the importance of initiating the process as soon as possible.
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Monthly Budgeting: Before committing to a savings plan, understanding your cash flows is essential. A budget provides clarity on income, expenses, and potential savings. It's a roadmap that helps determine if 10% is feasible or if starting with a smaller percentage is more realistic.
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Adjusting savings based on income: Not everyone's financial situation is the same. The article's advice to start with a smaller percentage if 10% seems unattainable is practical. The goal is progress over perfection. Starting with a smaller percentage and gradually increasing it aligns with the principle of making consistent progress.
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Gross Monthly Income: The importance of noting your income before any deductions cannot be overstated. It provides a clear picture of your earnings, ensuring that the savings percentage is calculated correctly.
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Purpose of savings: Savings serve multiple purposes, from emergencies to long-term goals like homeownership or retirement. Having clarity on your savings goals helps in determining where to allocate your funds.
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Automating savings: Automating the transfer of savings ensures consistency. It eliminates the human tendency to procrastinate or forget, making the savings process seamless and efficient.
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Where to keep savings: Choosing the right account type is crucial. Accounts with compound interest, like high-yield savings accounts or retirement accounts, amplify your savings growth. However, understanding fees, minimum balances, and the account's purpose (emergency fund vs. retirement) is essential.
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Separation of emergency fund and retirement savings: Mixing these funds can be detrimental. Retirement savings should remain untouched, benefitting from long-term growth opportunities. In contrast, an emergency fund should be easily accessible, preferably in an account with some liquidity and interest-earning potential.
In conclusion, the principles discussed in the article offer a structured approach to savings and financial planning. While the "10% rule" serves as a guideline, individual circ*mstances might necessitate adjustments. Regardless, the overarching goal remains consistent: cultivate a habit of saving, leverage compounding interest, and make informed financial decisions.
