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Ask Dave

The Percentage Isn't Magic

Trent asks what percentage of his income he should put into savings each month. Dave asks him how much wealth he wants to have.

QUESTION: Trent on Facebook asks what percentage of his income he should put into savings each month. Dave asks him how much wealth he wants to have.

ANSWER: How quickly do you want to be wealthy? The more you save, the more money you’re going to have. There are a lot of different percentages and things floating around. I figured out years ago that I want you to put every dollar you can squeeze out of your budget into savings until you have $1,000. That’s Baby Step 1.

Then, in Baby Step 2, I want you to put nothing into savings—not any retirement, not anything. Stop saving money completely and focus on clearing your debt. List your debts smallest to largest—everything but the house—and attack the smallest debt and work your way right down that list until you’re debt-free, everything but the house. You do that with focused intensity that’ll just go crazy. You sell so much stuff the kids think they’re next. You’re not going to see the inside of a restaurant unless you’re working there. You cut your lifestyle to scorched earth, and you clean out your debt.

Once you’re debt-free but the house, then what percentage do I want you to put in savings? Everything you can! I want you to continue your intensity and your tight budget until you raise that $1,000 account up to a fully funded emergency fund of three to six months of expenses. A fully funded Grandma’s rainy-day fund of three to six months of expenses. That’s Baby Step 3.

Then what percentage should you save? In Baby Step 4, you put 15% of your income into retirement. That’s Roth IRAs and matching 401(k)s as your first steps. After that, non-matching 401(k)s or 403(b)s—that kind of stuff. Above that, I want you to save money in Baby Step 5 for your kids’ college. In Baby Step 6, any other money you get, I don’t want you to save it. I want you to pay your mortgage off as fast as you can.

The average family working these six Baby Steps brings them to Baby Step 7, which is debt-free including the house, with retirement, and college underway. On average, the house and everything is paid off in about seven years.

So what percentage should you save? Everything in Baby Step 1, nothing in Baby Step 2, everything in Baby Step 3—as much as you can. It’s not a percentage that’s magic. Then I tell you 15% just to give you a guideline and say you need to do a healthy amount toward retirement while you do college while you pay off the house. Baby Steps 4, 5 and 6 you’re doing at the same time. The great evangelist John Wesley said if you will give 10% and save 10% and live on 80%, you will always have a good life. You’ll retire with dignity, you’ll have a good spiritual walk, you’re at least tithing 10%, which is a Christian term or Jewish term obviously, so you’re going to give 10% to your local church or synagogue. And you save 10%. If you’ll always do that, you’ll be okay. That would be true except for these people who are so deep in debt they can’t breathe, and it’s hard to save 10% and give 10% if you’re broke because you’ve got two big freaking car fleece payments and a student loan that’s been around so long you think it’s a pet.