How much of each paycheck you should save or invest

As a country, the United States stinks of saving money.

However, we collectively pulled ourselves together soon after COVID-19 began. In April 2020, Americans saved 34 cents for every dollar earned.

Lockdowns (governmental or self-imposed) and the lack of in-person entertainment have contributed greatly to this. But it was a revelation for many people, says financial expert Clark Howard.

“It was amazing. People’s spending has dropped like a rock. And people paid off their debts like crazy,” Clark says. “Banks were freaking out because people were paying off credit card balances that had never done this before.

“It was a huge inflection point in the way people handle money. The amount of money people were borrowing was decreasing. The amount of money people were saving was increasing like I had never seen in my life. »

According to Federal Reserve Economic Data (FRED), in July 2021 Americans were still saving more of every dollar than they had done in a sustained fashion since the early 1980s. But in the eight months since followed, we went from nearly 11 cents for every dollar we earn to just 6 cents.

The most recent figure, 6.2% savings in March 2022, is the lowest since March 2013.

“Six cents on the dollar is better than zero cents on the dollar. But that’s not enough to create security in your life,” Clark says. saving for the future, like retirement – or paying for a child’s education or a down payment on a house.

Worse, those credit card companies and banks aren’t worried anymore. Household debt increased by $1 trillion in 2021, according to the Federal Reserve Bank of New York. That includes a $333 billion increase in the fourth quarter of 2021. Both figures are the highest since 2007 – just before the financial crisis.

Credit card balances also rose by $52 billion in the fourth quarter of 2021, the highest in the data’s 22-year history. The tight supply of homes and cars, combined with the looming threat of much higher interest rates, were major factors.

Americans are also using “Pay in 4” services, installment loans for simple items like gasoline and clothing, much more frequently.

Clark worries about the financial stress people are under, especially with generationally high inflation and temporary uncertainty in the markets. Now is a great time to re-evaluate your approach to building an emergency fund and retirement savings.

“You take the whole financial cushion out of your life when you owe and owe and owe, and you don’t save money,” Clark says. “As you get into debt, you have to spend more money on that debt.

“If I’m describing you, take a time out. Try to put those expenses, borrowings, and savings back in the right direction. We showed two years ago that we could definitely do it. And now it’s time for us to get back to it.

Clark was saving 50% of his income early in his career, even retiring in 1987 when he was just 31 years old.

Daniel Sparks of the Motley Fool created a chart based on the numbers from If you increase your savings rate from 10% to 20%, you’ll probably be able to retire 14 years earlier.

Many experts say you should always save 20% of your take home pay.

But exactly how much of your salary you should spend on savings depends on many factors. This includes your age, how much money you have in a savings account, any debts you have (interest rates and amounts) and whether you are on track for retirement.

Clark has a good guide on the steps to take in your financial life. But his biggest directive has always been simple: live on less money than you earn.