saving 25% of your income

Is Saving 25 Percent Of Your Income Good?

Saving a quarter of your income is challenging, but doable. But is saving 25% good enough? Should you aim higher?

Here’s the short answer:

Yes, saving 25% of your income is good. It is five times better than the American average savings rate of 5%. Given a median income, saving 25% of that equals $14,153 in annual savings.

Below you see the average savings rate for American workers:

average saving of ones income

At no time has Americans on average saved more than 10-15% over a significant length of time. At the beginning of the pandemic, it sparked up to 33-35 percent, but it fell sharply down over the next year or two and is currently at 5%.

But you probably don’t care about the general answer. You want to figure out if 25% is good in your case.

Even though saving 25% is also good in most cases, for you it mainly depends on the two following factors:

  1. Your goals
  2. Your income

I’ll help you figure out if saving 25% of your income is enough by going through the two factors above. I’ll provide a ton of examples to make it easy to follow.

Oh, and I assume you invest your “long-term savings” in passive index funds or something equivalent. After all, saving money can’t make you rich. You have to put those bills to work!

Also, this article will not tell you how to save 25% of your income. If that’s what you’re looking for, you should instead read my article on the four steps to save a lot of money fast.

Is Saving 25% Of Your Income Enough? (For you specifically)

We’re now going to figure out if saving 25% is enough for you specifically. For a detailed guide on figuring out how much you should aim to save annually in USD terms, not a percentage, read this article: How Much Should YOU Save Per Year?

Let’s go through the two factors mentioned above, one by one.

It depends on your goals:

As always, to evaluate how good something is, you need a measuring stick. In this case, our financial goals are the measuring sticks.

How far will saving 25% take us towards the given goals? Only after answering that can we finally answer if saving 25% of your income is enough for you.

You should set short-term and long-term goals:

Your long-term goal should be the income you’d like during retirement. For example, you might have a goal of retiring on an annual income of $75,000.

Your short-term goal can be lots of different things. A few examples are having enough money to travel for 14 days per year, upgrading your car every 7 years, or taking your significant other out to a fancy restaurant once a month.

Spend some time and think about what you want, both in the short term and long term. Ask yourself this:

  • How much do I want to retire on? (annual income)
  • How much do I want to travel in the next few years?
  • When should I get a new car?
  • Do I treat myself, or my significant other, to the small luxuries of life often enough?

Once you’ve done some reflecting, you should write down something like this:

Long-Term Goal: Retire with an annual income of $75,000.
Short-Term Goal 1: Travel 14 days a year
Short-Term Goal 2: Get a new car in 7 years
Short-Term Goal 3: Take my wife to a fancy restaurant 12 times a year (once per month).

For the short-term goals, some estimations are enough to get an idea of how much you’ll need to save. In the example above, this is how much I’ll need:

Suggested reading: Is Saving 20% Of Your Income Enough?

Examples of short-term goals, and their required savings:

Short-Term Goal 1: Cost of travel is on average $271 per day. (source) To travel 14 days per year, I, therefore, need to save $3794 per year.

Short-Term Goal 2: A new car will cost me roughly $12K, if I trade in the old one (or sell it independently first). Over a seven-year period, that comes out as $1,714 a year.

Short-Term Goal 3: I guestimate that a fancy restaurant will cost me roughly $200 for me and my girl. doing it monthly comes out to $2,400.

In summary, to reach my short-term goals I’ll need to save $7,908 annually.

Example of a long-term goal, and its required savings:

My long-term goal: retire with an annual income of $75,000.

According to the 4% rule, which says that you can withdraw 4% annually from your saving/investments without depleting it to quickly, I’ll therefore need to save up:

$75,000 / 0.04 = $1,875,000

Just divide your target annual income by 0.04 and you’ll get your long-term saving target. This is the number of dollars you should have saved up before retiring.

Now, we need to get that down to a yearly saving plan. This depends on how many years you have left to work before entering retirement.

As a 24-year-old guy, I’ve got roughly 40 years of work left before retiring. Assuming I invest my savings in passive index funds with a 7% annual return, here’s how much I’ll need to save to reach $1,875,000 in 40 years:

is saving 25% of my income enough?

There’s no “easy” formula to use in order to calculate it, so I’ve made a few tables showing a bunch of different examples. Try to find your long-term goal in one of them:

(The tables below assume you have no savings at year 0. If you’ve got some savings already, plug it into this calculator and put the “Return Rate” to 7%, the time period equal to the years you have left until retiring, compounding annually, and set “Additional Contributions” to “0”. The calculator will show you how much your current savings will be worth when you retire. You then subtract the future value of your current savings from your long-term savings target, and use the new number as your target in the tables below.)

How much to save to reach your goal in 40 years:

Target Annual incomeLong-Term GoalRequired Annual Savings

How much to save to reach your goal in 30 years:

Target Annual incomeLong-Term GoalRequired Annual Savings

How much to save to reach your goal in 20 years:

Target Annual incomeLong-Term GoalRequired Annual Savings

Alright, I hope you found your goal, or something close to it, and have your long-term goal translated into an annual savings plan.

Now, sum up your short-term savings requirements and your long-term savings requirements and sum it up, like this:

Short-term savings + long-term savings = $7,908 + $9,392 = $17,300

To reach all my financial goals, I need to save $17,300 annually.

Now, is 25% of my income enough to reach that target?

It depends on your income:

How much you make determines how much saving 25% becomes. For example, earning $100K a year and saving 25% of that is $25K/year. Saving 25% of $45,000 is just $11,250.

Here’s what you need to do:

Take your annual income and multiply it by 0.25. If that number is higher than the required annual saving to reach your goals, saving 25% of your income is enough.

If your income times 0.25 is lower than your savings target, you must save more than 25%. I suggest your check out one of these articles:

Given a median income of roughly $56,613, saving 25% is equal to $14,153. That’s enough for most people, but not enough if you want to retire with a high annual income, or have really ambitious short-term goals.

Conclusion: In most cases, saving 25% of your income is good

Saving 25% of a median income is equal to saving $13,750 per year. That’s likely enough to retire with an annual income better than most others. Given the average saving rate of 5%, saving 25 percent is five times better is great.

Happy saving!
– Oskar