Is Dave Ramsey’s baby step #4 “Saving 15% of your household income” truly enough for your future?

Today we are going to dig a little deeper into what this means for you and how you should think about your savings.

Is Saving 15% of Your Income Enough?

Resources:

• Social Security Increase 2023 (What Retirees Need to Know)

Full transcript:

SPEAKERS

Alex Okugawa & Matt Calcagno

Alex Okugawa 0:00
Dave Ramsey says you should save 15% of your household income for your future. So is that enough? Today we’re going to discuss what that means and how you can make sure you’re on track for your future in retirement. Stay tuned.

Hey there, it’s Alex and Matt from One Degree Advisors. If you’re new here, we are certified financial planners that help folks with all things tax retirement, and investment related. So today, Matt, we’re talking about Dave Ramsey, specifically his baby step program. The baby step program is designed to help folks get back on track, and get their finances in order. And in the baby. Step number four, it’s investing 15% of your household income in retirement. I know some people might look at that number and say, 15%, that’s way too much. I can’t even save that much. And that’s more than you’ll need. And then you’re gonna have another camp of people that says, well, that’s clearly not enough. So today, let’s first address 15%. Is that enough?

Matthew Calcagno 1:00
Yeah. Well, first of all, I think that a 15% Number is a great start, especially for the masses, which is ultimately Dave Ramsey’s audience, right? He’s speaking to broad swaths of people. But I think we should dig a little deeper here, right? Because there are a lot of different variables at play when it comes to the 15% rule. And of course, with every recommendation, there’s going to be a caveat.

Alex Okugawa 1:21
That’s right. So today, we’re going to cover basically three orders of operation are kind of like a three-step checklist that folks should go through, as you think about savings. And step number one here is, where are you at, think about where are you at with your personal finances today.

Matthew Calcagno 1:37
Yeah, and Fidelity has really some great research here that I strongly agree with, they say, the single most important thing you can do is start saving earlier. The earlier you start, the more time you have for your investments to grow and recover from the market’s inevitable downturns because we know they are inevitable. But the truth is a 15% is just a rule of thumb. And depending on where your age is, and I’ll pull this up here, if you’re in your 20s, 30s, or 30s, that number is going to be different. You know, if you have no savings in your 40s, you might have to start ramping that up. And, of course, as you move throughout life, and you potentially make more income, there’s gonna be a lot of different competing forces coming for your money. So I’m going to quote, I’m going to quote one of my favorite authors here, Morgan Housel, you don’t want to be in a situation where one step forward, moves the goalposts, two steps ahead.

Alex Okugawa 2:30
Exactly. And this is, you know, we commonly refer to this as lifestyle creep, right, you start making more money, you get additional bonuses as you move up in your career, and all of a sudden, your savings rate targets a certain lifestyle down the road. Well, now that goalposts move because you’ve elevated your living standards, so just making sure that we keep that in check, and it’s okay to spend money, but we have to make sure that our savings are in balance to make sure we can meet our needs. The second order of operations or the second piece on the checklist here is thinking about where you should be saving because there are a lot of different investment accounts that you should or you could be saving into.

Matthew Calcagno 3:08
There’s tons of different ways you can get there and build your wealth. But really, I want to highlight three, three in a nutshell. Number one, you have your employer-sponsored retirement plan. You know this is one of the great ways that many Americans build long-term wealth. And that’s through automating their investments through each paycheck, going straight to that account. This is honestly how most Americans save for retirement. The second one here we have a Roth IRA. And, you know, some caveats here. Not everyone is eligible for Roth IRA, there are thresholds for income.

Alex Okugawa 3:40
But if I can, I mean, it’s a very powerful tool to have tax-free income in retirement, you know, based upon certain rules,

Matthew Calcagno 3:47
but exactly, exactly. And the third one I want to bring up here is the regular brokerage account, right, this purely accounts where you can invest in the stock market, it’s, it’s really flexible, unlike retirement accounts, you know, if you take money out, you will pay capital gains if there are gains in there. But it’s not like you’re gonna pay penalties with those.

Alex Okugawa 4:07
I mean, the thing is, is you know, when you make a video like this, and you’re trying to figure out what’s the most optimal way to do it, we have to assume some generalities. But in general, really, this is one of the better orders to do it, each person’s situation will be different. But let’s consider the third piece of this checklist, which is okay, so I have all these accounts. What’s the correct order for me to be saving in these different accounts?

Matthew Calcagno 4:30
Yeah, and every person’s situation is different. And I know you don’t want to hear that answer. You want to you know, what, what do you want me to do today? So I just want to pull up an example of somebody this might not necessarily apply to you, but someone who’s making 175,000 a year, they have a $25,000 bonus, you know, where do you how do you allocate that money? Well, first of all, tax or do Uncle Sam wants his piece, so you have to factor that in when you’re bringing up your income and savings. Second, you’re going to have your 401 K if you have a 401k, you know, being able to max out that potential, if you have a 401k match, that’s free money that you don’t want to leave on the table. So if you max that out, you know, lat the third one is going to be your Roth IRA if you’re eligible again, that’s that huge advantage down the line in retirement to have tax-free income and the rest, you know, you can either allocate towards maybe a brokerage account that’s more flexible or you know, your emergency fund your cash savings, and then ultimately, everything else comes after that I like, I like putting it this way. You know, you, you start with your taxes, you start with your savings you start with, you know, we talk a lot about giving and philanthropy, but you just start to live off the remainder.

Alex Okugawa 5:42
Yeah, exactly. And now let us know what you think when you think about Dave Ramsey’s, baby. Step number four, invest 15% of your household income. Is that too much? Or is that too little? Leave your thoughts in the comments down below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.

Transcribed by https://otter.ai

The One Degree Blog

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