People Who Save 20% of Their Income Do These Key Things
Tags: Investing, Money, Saving

Conventional wisdom used to dictate that saving 10% of your income for the future would ensure a comfortable retirement. But rising living expenses and longer life expectancies have caused many financial experts to toss that once-valid guidance out the window. Nowadays, many in-the-know folks agree that you should aim to save 20% of your income for a shot at a financially secure future.

Doing so, however, is easier said than done — but it can be done. In fact, those who consistently make a point of setting aside 20% of their income uphold certain habits that make that goal possible. According to TD Ameritrade, here’s how they manage to pull it off.

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1. They avoid high-interest debt

A good 65% of people who save at least 20% of their income stay away from high-interest debt that could otherwise monopolize a large chunk of their earnings. For the most part, this means avoiding credit card debt, though keep in mind that any time you take on large amounts of debt, you tie up your money in monthly payments and risk falling short on your savings goals. Therefore, as a general rule, pledge to never charge more on a credit card than you can afford to pay off by month’s end, but also aim to keep your healthier debts, like your mortgage and car payments, on the low side.

2. They follow a budget

If you don’t know where your money is going month after month, you’re apt to have a hard time saving much of it. That’s why sticking to a budget is crucial, and it’s something that 60% of folks who save 20% of their income do.

If you don’t have a budget in place, carve out some time in the near future to create one. All you need to do is comb through your bank and credit card records to identify what your recurring monthly expenses cost you. Some of these, like groceries and entertainment, might be variable, so scan your records to arrive at an average. Then, factor in once-a-year expenses, like membership renewals or insurance premiums, and account for them as well. Once you have that budget in place, you’ll be able to see where you’re overspending and where there’s room to cut back and boost your savings rate.

3. They invest in the stock market

Putting money in stocks is a good way to give your savings a boost, thereby helping you set more cash aside than you might otherwise manage. An estimated 58% of people who save 20% of their income invest in the stock market, so if you’ve yet to dabble in it, read up on how to get started.

Of course, the idea of buying stocks might seem daunting if you’ve never done it before, so if you’re worried about choosing the wrong companies to invest in, you might consider buying some index funds instead. Index funds are passively managed funds that track the broader market so that when stocks are up on a whole, you get a piece of the action. Researching them is much less complicated than vetting individual stocks, so it’s a good bet when you’re first starting out.

4. They max out their retirement savings

It’s easier to save a large chunk of your earnings when you get a tax break for doing so. A good 55% of people who sock away 20% of their income max out their retirement plan contributions, and if you start doing the same, you might find it easier to meet your goals. Currently, workers under 50 can contribute up to $6,000 a year to an IRA and up to $19,000 a year to a 401(k). Those 50 and over, meanwhile, get a catch-up provision that raises these limits to $7,000 and $25,000, respectively. If you save your money in a traditional IRA or 401(k), your contributions go in tax-free, which can no doubt make it easier to part with all of that cash up front.

You don’t need to be an exceptionally high earner to save 20% of your income. You just need to commit to that goal and uphold smart habits that help you achieve it. If you’re unhappy with your current savings rate, take a lesson from the folks who have mastered the art of socking away a large portion of their earnings, and with any luck, you’ll soon join their ranks.