You’re quite correct MLS. Lest I sound like a fiduciary evangelical, one has to have money to make money. If you’ve got a choice between paying a credit card or having the electricity cut off (which has happened to me on more than one occasion), the choice is obvious.
I’m not depressed, just out of my league, and it was an accident, not a mistake – I got hit in traffic while walking to work and missed six months of work with 75% wages for it. After my settlement, I might even wind up being better off monetarily than I was last year since I intend to use it to pay off every last bit of my debt, buy a car, and then put the rest away, assuming I have any left.
Trying to figure out what to do with what I might have left over is what’s intimidating me but, to mix metaphors, I won’t count my eggs until I’ve crossed that bridge.
Living on 1/3 of your income, I am convinced, is only possible for those with high incomes or those living in places with low costs of living.
If you examine guidelines for reasonable housing costs, many community struggle mightily to provide housing for families that will not exceed 1/3 of their income. That’s HOUSING alone. No other expenses. And demand for housing that “cheap” exceeds supply.
I have no idea what kind of data point to provide here, because people define “savings” differently. We save pretty aggressively, but a lot of it is earmarked. Some for kid’s college, some for retirement, neither of which can be used as “savings” without penalty. We also have some socked away for more house next time we move.
Flat out “savings” hasn’t been a huge priority as long as we’re meeting those needs.
The rule of thirds is a joke for the vast majority of people in this country. The largest number I’ve ever put down on line 22 of the 1040 was just over $22k, and any savings/401k/anything I’ve ever had were used up during the years line 22 was closer to $6k.
That said, I try to put 10% of every check I receive into savings so that when things go bad (as they often do) I have something resembling a cushion. Perhaps someday I’ll get a real job that doesn’t do layoffs but I’m not holding my breath at this point. 
Think of it as a long ass camping trip instead. I suppose if you lived in a national park in a tent and didn’t own a car (hello motor scooter) its possible to live on a third of ones income.
I’ve never had a real job so I can’t answer the OP. However when I do get a real job and make decent money I hope to save at least half. That shouldn’t be hard as starting wages are about 35k in my field and i’m a single, frugal person.
Americans used to save about 8% of income. But with the rising stock market from 1982 to 2000 people started to live off increased wealth. This continued in recent years with rising home equity.
Getting back to your question, we saved about 25% a year till we had kids. Then we went back to about 0% for several years when the kids were younger, because of babysitting costs, etc. But we did fund our retirement plans so I guess even then the number was about 10% or so. I’ve done very well the last three years and I’d guess we’re back to about 25%, maybe more. Some of it’s hard to judge. For instance, we made a $50,000 improvement on our house that increased the value by a lot more than that. So do we count that as savings?
I’m not familiar with this save 1/3, invest 1/3 and live on 1/3 rule-of-thumb, but couldn’t one’s mortgate count for that 1/3 meant to be going to investment? Like any investment housing prices could go down, but at the moment we have a ton of equity in the house and consider it our major investment.
Anyway in terms of strict savings around here we each contribute %5 pre-tax to a 401k or to an IRA and spend almost all of the rest.
Bricker, do you have any links you can provide to sites that suggest this save one-third, invest one-third, live on one-third plan? Not that there’s anything wrong with it; on the other hand, you’d be doing quite well to live on only one-third of your income. It’s just not possible for most people, including me and I’ve never heard anyone advocate such a plan.
No, this is home-spun wisdom … no cite.
My only comment on the responses thus far is that if you are paying a mortgage, that definitely counts as “investment” - to answer several people concerning the cost of housing.
I started out life living extremely poor. Had to – I WAS extremely poor.
When things began to turn around for me, salary-wise, I kept living extremely poor. I had no cable, I didn’t buy CDs, I didn’t eat out, etc. I caught some flack from friends/co-workers for this, and I admit that perhaps I took it too far. Today, for example, I am quite comfortable salary-wise, and I this morning I realized I still diligently save all the little slivers of leftover soap so I can mash 'em together to keep using them up.
This is pretty extreme. The author of Smart Women Finish Rich, who is a professional financial consultant, recommends putting away 12 percent a month into retirement accounts, and then to have enough money in short-term savings to cover between 3-12 months of expenses, just in case of emergency.
Obviously, you can invest some of your money outside of retirement accounts, if your goal is to become wealthier and wealthier, but this is not necessary for financial security. And some people don’t have money left over to do this after doing the above.
Saving too much is almost as bad as saving too little. Leaving the issue of inheritance aside, a person’s end goal should be to spend his last dollar 1 second before he dies. If you oversave, then you end up old with a pot of money but having lived a frugal life which effectively means you’ve given yourself a paycut throughout your entire life.
A little bit of oversaving is good in case something unexpected comes up but, IMHO, 66% is excessive and does more harm than good.
FYI, I tried to find websites that suggested these percentages. The best I could do was a site that suggested that roughly one-third of one’s gross income goes to taxes, one-third should be savings and investments and one-third other spending. Perhaps that’s what you remember? Or possibly, one-third (of the after-tax amount) on the mortgage, one third to savings and investments and one-third other spending?
Wesley, let me introduce you to my uncle, Sam. Sam is going to take more than a quarter of your income, up front, before you even get around to paying rent, buying food, gas, clothes, making a car payment, et cetera.
I, too, once lived the dream of saving half of my income and living off the lesser salary. Repeated RIFs/layoffs/company failures, a few periods of extended unemployment, a couple of 401(k) frauds, and a failed marriage later, I’m just happy to be salting away 10% annually. And I’m pretty frugal, aside from my insistance on grocery shopping at Whole Foods, my literature addiction, and my current predlicition for single malt Irish whiskeys.
But good luck to you.
Stranger
Save 1/3 of your income? As in, 33 %? Wow.
I save money regularly. Some of my money comes out of every paycheck and goes straight into a savings account. Some more of it trots off to the 401K plan.
I am nowhere near 33 %. And may never be. 
Single. renting and saving about 6%; am using about 12% to pay down a sizeable amount of credit card debt, which probably won’t be cleared for another 4-5 years.
In my particular situation, I could see saving/investment at the 33% level only once my debt is paid down and even then only if I purchase a residence and count that as investment.
I agree about oversaving being bad, unless: 1) you’re saving for something specific, like purchasing a home or car, 2) You are saving for very early retirement, 3) You’re doing it to max out your tax-deferred contributions, or 4) it matters a lot to you to leave your kids a pile of money.
One thing people forget about saving for a normal retirement is that there is a definite risk that you will die before you get to spend it, or be too sick to enjoy it. My grandparents saved everything they could their entire lives, with the plan of living a nice comfortable retirement travelling around the world. But within a couple of years after retirement my grandmother had arthritis so bad she could barely walk, so they spent their first five retirement years sitting around their house. Then my grandmother had a stroke and died, and my grandfather contracted Alzheimers. After he died, the family fought over their money, which broke the family apart and now they don’t speak to each other.
Their ‘nest egg’ turned out to be a disaster, and they scrimped their entire lives to build it.
My feeling is that you should attempt to save enough to put your kids through college, and to be able to retire at a reasonable age and maintain the same standard of living you had while you were working. But after you retire your living expenses also go down, and you’ve probably got your mortgage paid, so you don’t need as much income to maintain the standard of living. My wife has a good pension that will pay her 70% of her salary after retirement, and we supplement that to bring it up to 100%. I have a pension plan as well, but being in software the odds that I stay with this company that long are pretty slim, I’d think. I save 9% of my salary, plus I re-invest my tax return each year into a tax-sheltered savings account - that’s roughly another 2% or so. I also put another 2.5% into a retirement supplemental fund the employer has which goes straight into tax-exempt mutual funds.
In addition to this, we put roughly a thousand bucks a year away into my daughter’s education fund.
Our main source of retirement income is our house. Part of our ‘savings’ plan is to have our house fully paid by the time we retire. At that point we’ll most likely move into a smaller home, and the difference in value will add to the retirement nest-egg. Our daughter’s inheritence when we die will be whatever’s left in cash, plus whatever house we are living in at the end.
As for the article, does anyone else think it’s strange that they consider ‘the good life’ to include a ‘vacation home’ that’s worth more than the primary residence? Is this an eastern big city attitude? I know lots and lots of people of all income levels, and if anyone owns a ‘vacation home’ it’s usually a little cabin on a lake or something similar, and I wouldn’t consider it a pre-requisite for the ‘good life’. I personally have no desire to have the hassle of a second home to worry about, just so I can ‘get away’ to it a couple of times a year. And that second home is such a big line-item in their calculations that it really skews the numbers and makes ‘the good life’ look much more expensive than it is.
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I agree. In my experience, it is only the extremely wealthy that do this. I know some very wealthy people that have homes in the ski areas, but without exception they own condos and they have a management company renting them out for a good part of the season.
People who make the kind of money that they are talking about ($250-350K) might be partners in law firms or consulting companies, and their wages are flexible. I can’t imagine anyone spending upwards of $500K on a second house while saving only 1% of income. One bad year with a smaller bonus could mean foreclosure.
I think a lot of people see the vacation house as a good investment in itself, and depending on when and where they bought it, they’re probably right.
It’s not too uncommon for people to have a vacation house here in North Carolina, either up in the mountains or over at the beach. I know a few doctors (all of whom would be in comfortable “good life” range) who have such houses that have skyrocketed in value over the last few years. My parents bought a lot on Lake Cumberland (in KY), and they were offered twice what they paid for it only a few months later. So I guess it’s possible that the value of the vacation house just outpaces the value of the primary residence.
Prior to this year, I was saving about 25%, 15% in the 401k, 10% in company stock (got a big discount on it). This year, the big discount is gone, so I stopped with the stock plan, and am spending that other 10% to make ends meet. When my wife’s work picks up, most of that income will go into savings, hopefully to invest in a home.
Thinking more about this article… it annoys me. It seems to me that it’s presenting a very distorted view of what the ‘good life’ is, and making it seem unattainable. Not just the million dollar vacation home, but the $20,000/yr vacation budget, the $1000/mo dine-out budget, and the $18,000/yr vehicle budget. None of this is necessary for the ‘good life’. In addition, the $20K/yr private school budget might be necessary if you live in an area with bad schools, but there are lots of small cities in America where the public school system is perfectly fine.
Plus, the article has a real ‘80s’ vibe to it. This may be the way the rich wanted to live 25 years ago, but today I think it’s a lot different. People today are much more likely to spend their excess dollars on home improvements (home theaters, offices, computers, big screen TVs, patios, landscaping, fancy appliances), toys (motorbikes, boats, hobbies), and eschew the 2nd home. Modest-priced cars are of very high quality these days, and I think even the wealthy tend to hang on to them longer than they used to. I can remember back in the 70’s when one of the signs of wealth was to trade in your car every year for the new model. Now I think the new cars are so good that people who can afford to trade them in don’t bother because it’s just not worth the hassle, unless a new car comes out that’s very compelling.
For me, “the good life” means living in a nice house you feel good about, that has the amenities that allow you to pursue your hobbies. It means having a reliable car for each breadwinner in the family (they can be a few years old), preferably with a bit of style and performance. It means having enough disposable income that I can buy a new DVD or CD or book that interests me whenever I want, and maybe once every couple of years upgrading my computer, TV, stereo, or whatever. It means being able to afford the odd toy like a new R/C plane, and having enough cash to maintain my pilot’s license and fly recreationally once in a while. Also, having enough money to take a summer and winter vacation (not an expensive one, just maybe 3 days of skiing in the winter and a week at the lake in the summer). Eating out? Sure, once a week. That’s all we have the energy for anyway. Nothign extravagent, but maybe seafood one week, a steak house the next, etc.
Above all, the ‘good life’ means having enough money that you arent’ living paycheck to paycheck. No credit card debts, no worries about money, and enough in the bank for emergency home repairs or to cover a temporary job loss.
These are attainable goals for any family with two professional incomes, and they are attainable goals for others who are willing to save a little money for a few years. In an area of modest real-estate prices and good schools, I think the price tag for ‘the good life’ is about half of what the article says.
As for savings, shouldn’t we count social security? After all, it’s probably the reason why people don’t save in the first place. That, and medicare, and all the other safety net programs make it much less important to have your own nest egg. If the state is going to take care of you, why not just spend your own money? And if you’re already giving the state 8% of your salary for retirement, why save more?
That would be the law of unintended consequences in action.