How Much of Your Income Should You Be Saving?

By Michael Masterson

If you intend to put yourself on the fast track to wealth, you not only have to dramatically increase your income, you have to save - and invest - as much of that money as possible. And you want to do it without that miserable penny-pinching feeling. Said differently, you want to save as much as you can while you are still "living rich."

For most people, "living rich" means spending more than they make. Indeed, studies show that the more people make, the more they spend. But smart savers know you don't have to crank up the spending as your income increases. On the contrary, the percentage of their income that is saved increases as their income increases.

Many financial planners recommend a savings rate of 10 percent of your net (after-tax) income. My recommendation is a minimum of 15 percent of your gross (pre-tax) income. That's an aggressive savings plan - but if you incorporate my ideas for living rich into your budgeting, it can be done.

Let's say you make only about $35,000. (That's the average salary of a recent college graduate these days.) Fifteen percent of that is $5,250. That's a lot of money to sock away every year. If you have your own business (either a full-time business or something that you do on weekends) and invest in real estate, you will be able to realize significant tax savings, even at the $35,000 income level. As a ballpark figure, I believe you should be able to reduce your taxes - state, local, and federal - to no more than $5,000 a year. That would leave you with $30,000 to live on.

Smart savers with that kind of modest income would leverage up their lifestyles by sharing living quarters with one or more people. A $10,000 allocation toward the rent/mortgage and utilities would leave you about $15,000 a year (or $1,250 a month) to spend on food, clothing, and fun. By shopping wisely (vintage stores instead of The Gap, homemade meals instead of restaurant dates), you could live very well - even richly - on $1,250 a month.

Now, let's say you quickly ratchet up your income to $150,000. In Automatic Wealth, I suggested many ways to do that in three years or less. In Seven Years to Seven Figures: The Fast Track Plan to Becoming a Millionaire, I provide specific examples of people who have done that ... and better. With an income of $150,000 a year, you can expect to be paying about 25 percent of it - or $37,500 - in taxes. The rest ($112,500) would be available for housing, "living rich," and savings.

Assuming you paid $36,000 for housing and associated costs, and then tripled your living-rich expenses to $30,000 a year ($2,500 a month), you'd have $46,000 for savings. That represents a savings rate of 40 percent. Split your housing costs with a roommate, and you'll be able to save 55 percent of your income!

If you would like to maximize your wealth-building progress (i.e., accelerate the pace at which you acquire wealth), I recommend that you set for yourself the following rate-of-income saving targets:

• If you are making less than $30,000 a year: 15%

• More than $30,000 but less than $50,000: 20%

• More than $50,000 but less than $150,000: 25%

• More than $150,000 but less than $300,000: 30%

• More than $300,000 but less than $500,000: 35%

• More than $1 million but less than $2 million: 40%

• More than $2 million but less than $5 million: 50%

• More than $5 million: 55%

Saving half your gross income may seem insane, but it's entirely possible. And it can be done without pinching pennies. I have never denied myself anything I wanted. I have, however, learned how to make thoughtful buying decisions. By investing in products and services that add true value to my life - that enrich my life in meaningful ways - I've been able to save at least 50 percent of my gross income for the past 20 years ... even now that I'm paying as much as 35 percent of my gross income in taxes.

[Ed. Note: This article was adapted from a chapter in Michael Masterson's JUST-released book, Seven Years to Seven Figures: The Fast Track Plan to Becoming a Millionaire, Copyright (c) 2006 by Michael Masterson. Reprinted with permission of John Wiley & Sons, Inc.