mikeguima wrote:Hey everyone!
I posted this in the other thread about each one's personall savings rate but since it was a relatively different subject, I'll (re)post the question here:
"
Save 10% and you'll be fine
Save 20% and you'll thrive
Save 30% and you'll be wealthy
Sounds awesome!
Thanks!
mikeguima,
The question could be answered easily if you convert the number into the percentage of current annual expense.
It is very simple. It cannot be over the net income.
Let's assume that it is the net income.
A) If you save 10% of the net income, it meant that you spend 90% of the net income. Your savings as a percentage of the annual expense = 10%/90% = 0.11 = 11% of current annual expense.
As per standard personal finance rule, a person should have 3 to 6 months of the emergency fund before start investing.
3 months of emergency fund = 3/12 = 25% of annual expense.
6 months of emergency fund = 6/12 = 50% of annual expense.
With 11% of saving per annual expense every year, the person would need 2+ years to save 3 months of emergency fund. And, 4+ years to save 50% of the emergency fund.
Let's assume ROI of 6%.
Starting Net Worth $0
Annual Savings 11%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 61% 138% 237% 364% 525% 731% 994% 1329% 1757%
6.00% 62% 145% 256% 405% 604% 870% 1226% 1702% 2340%
7.00% 63% 152% 276% 451% 696% 1039% 1521% 2196% 3143%
8.00% 65% 159% 299% 503% 804% 1246% 1895% 2850% 4252%
9.00% 66% 167% 323% 563% 932% 1499% 2373% 3717% 5784%
So, it works if you assume that this person has a perfect job security. He/she can survive multiple recessions without job security. And, there are zero financial emergencies across 45 years that impact his/her saving and investment.
<<
Save 10% and you'll be fine>>
This statement is false if it is over the net income. It assumes a level of job security that most folks do not get.
<<
Save 30% and you'll be wealthy>>
B) Let's do the same analysis with this statement. 30% saving over net income = spend 70% of net income. Saving per annual expense = 30/70 = 43%
Starting Net Worth $0
Annual Savings 43%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 238% 541% 928% 1422% 2052% 2857% 3884% 5194% 6867%
6.00% 242% 567% 1001% 1582% 2359% 3400% 4792% 6655% 9148%
7.00% 247% 594% 1081% 1763% 2720% 4062% 5944% 8584% 12287%
8.00% 252% 623% 1168% 1968% 3144% 4871% 7410% 11139% 16620%
9.00% 257% 653% 1263% 2200% 3642% 5861% 9276% 14529% 22612%
You need about 25 years to reach 25 times annual expense. So, this is doable.
But, if it is 30% saving over gross income, you will be saving close to 100% of your annual expense.
Starting Net Worth $0
Annual Savings 100%
Years
Annual Return Rate 5 10 15 20 25 30 35 40 45
5.00% 553% 1258% 2158% 3307% 4773% 6644% 9032% 12080% 15970%
6.00% 564% 1318% 2328% 3679% 5486% 7906% 11143% 15476% 21274%
7.00% 575% 1382% 2513% 4100% 6325% 9446% 13824% 19964% 28575%
8.00% 587% 1449% 2715% 4576% 7311% 11328% 17232% 25906% 38651%
9.00% 598% 1519% 2936% 5116% 8470% 13631% 21571% 33788% 52586%
You only need 15 years. It is much stronger and better likelihood.
From the math, those % should be over the gross income.
It is very simple.
Saving as a percentage over annual expense is a better approach.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry