Paycheck Chronicles

What's Your Savings Rate?

A common rule of thumb is that you should save 10% of your income.  For some that is impossible, for others the number is too small.  Regardless of what number is right for your situation,  I've always wondered...how do you calculate that?

For most people, the question is whether it should be their before tax income or their after tax income.  Being military makes it more complicated.  Are we talking about the total amount of money that is showing up on your LES every month, including housing allowance and other things, or just base pay?  What about things that come and go, or things that change, like Cost of Living Allowances, or hazardous duty pay, or sea pay?

Which numbers you use changes the calculations a lot, especially if you live in a high cost area or you get a lot of special pay.  For example, for an Army Sergeant (E5) with over 4 years of service makes a base pay of  $2669 per month, and BAS of $368 per month.  If living on base, there is no housing allowance.  However, living with dependents in the DC area would add $2262 a month to the income.  It doesn't quite double the sergeant's income, but it is close.  If he or she were trying to save 10% of their income, would you base that on $2669, $5,299, or some other number?

Ultimately, it isn't the magic percentage that matters, but rather the actual dollar amount that you are saving.  How you are saving is also important - sticking it in your sock drawer will yield different results than putting it in a tax-advantaged retirement account, or buying a non-profitable investment property, or creating a CD ladder.  But if you're just getting started, guidelines like the 10% suggestion can be helpful.  But 10% of what?

My general recommendation is that folks focus on base pay, and I would like to see them saving 1% more than whatever they're saving right now.  (Yes, I know that is cheating.)  Start contributing to the Thrift Savings Plan, and an Individual Retirement Arrangement (IRA) if you have a spouse who can't contribute to an employer plan.  With each yearly pay raise, promotion, and time-in-service raise, bump up your contribution level 1%, until you've reached the IRS limits for contributions to each account.  Then open another account, maybe an IRA for the service member, or a SEP or SIMPLE IRA if the spouse has a small business, until you can't save any more tax-advantaged money.  Then, look to taxable investment accounts.  If you start with 1% when you start working, and increase the percentage at every opportunity, you'll soon find that you're saving a lot of money.

At the highest level, your savings rate is irrelevant.  What's important is that you start saving something.  Don't get stuck in the details, but rather take action that will move you in the right direction.

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