The average saving rate by income increases the more you make. That's logical since living expenses like housing and food tend to more relatively more fixed, unless you suffer from tremendous lifestyle inflation.
However, the average saving rate doesn't always increase with more income due to a lack of discipline. We all know people who spend way too much and live paycheck-to-paycheck despite huge salaries.
Before the global pandemic began, Americans as a whole didn't save a lot of money. Up until May 2020, the average saving rate was only around 7%. At least 7% was better than the average saving rate of only 2.4% in 2006.
In other words, it takes the average American 13 – 45 years to save just one year's worth of living expenses. That is a disaster if you want to achieve financial independence sooner, rather than later. And Financial Samurai is all about readers reaching financial independence ASAP.
When you're 60-something years old and only have several years worth of living expenses to buttress your declining Social Security checks, life isn't going to be very leisurely. You'll probably be mad at the government for lying to you and mad at yourself for not saving more when you still had a chance.
Americans Can Save More Money If We Want To
Thankfully, Americans have learned their lesson. The average saving rate shot up to 33% in April 2020, but fell back down to below 8% in 2022, and is now just 4% in 2024. As the economy recovers, people feel confident spending more.
The good thing about the huge ramp in the average saving rate in April 2020 is that Americans can save if we want to! Sure, there was a lot of free money from the government that helped boost our savings. But when we are locked down and everything is closed in real life, our saving rate naturally goes up.
Just be careful spending too much, given our economy could go into a recession after 11 Fed rate hikes and a prolonged inverted yield curve. Here's a recession preparation checklist to survive bad times potentially once again.
A Distortion In The Average Saving Rate
The problem with averages is that averages distort reality. Median is a more appropriate metric, but how does one find the median saving rate?
For example, according to the latest Consumer Finance Report, the average household has a net worth of approximately $1.02 million. That's right, the average American household is now a millionaire! However, you and I know that this is unlikely based on common sense. But simple math doesn't lie.
Take the total household wealth in the US of about $110 trillion (according to the Fed) and divide by 115,226,802 US households (according to the Census Bureau) and you get almost a million dollars per household.
But as we also learn from the Consumer Finance Report, the median net worth of an American household is closer to only $192,000. $192,000 is much more reflective of the typical American household. Hence, the average saving rate you see may not be reflective of the typical saving rate of the American household, given wealthier households can easily save much more.
Related: How Much Should My Net Worth Be By Income?
I'm absolutely positive more than 90% of Financial Samurai readers save more than 4%. We are personal finance enthusiasts after all, obsessed with trying to achieve FIRE ASAP. Therefore, what's the reality behind this ~4% national savings figure? The truth is that savings rates vary by income.
Average Saving Rate By Wealth Class
Take a look at this fantastic chart by economists Emmanuel Saez from my alma mater, UC Berkeley, and Gabriel Zucman from the London School of Economics. It shows the average saving rate by income, or wealth class as they call it.
The dotted line shows the often quoted 4% figure, which is made up of the bottom 90% of income earners. The top 10% to top 1% of income earners save roughly 12%, which I find surprisingly low. It's only the top 1% who saves an impressive figure at roughly 38%.
Related: Who Are The Top 1% Income Earners?
Average Saving Rate For The Top 1%
The average saving rate for the top 1% is 38%. This average saving rate of 38% is key for EVERYONE to try and shoot for.
The top 1% of income earners can clearly save more of their income because less of their income is being taken up by necessities such as housing, transportation, food, and education.
The 38% savings figure also blows away the feel-good myth by the middle class that rich people tend to blow their money and end up broke in the end like the rest of us. The rich are rich for a reason. And one of the reasons is an impressive savings rate.
Related: How Much Do The Top 1% Make?
The Average Saving Rate By Income Needs To Increase
I strongly believe everyone should start with a minimum 10% savings rate, and gradually increase their savings rate by 1% a month until it hurts.
After staying with the painful savings rate figure for several months, the pain starts to go away. We humans are adaptable and will naturally change our spending habits to adjust to our incomes. I
If your savings rate doesn't hurt, you are not saving enough. The average saving rate by income needs to drastically increase. It needs to stay elevated for decades to help people achieve financial independence.
The ultimate goal is to shoot for at least a 20% steady state savings rate so that every five years of work equates to one year's worth of savings. By the time you work for 40 years, you'll have therefore accumulated at least 8 years of savings. Thanks to compounding, you will likely have even more.
If you don't want to kill yourself at work for 40 years like the typical person, then you must figure out a way to save more. Once you regularly save 50% of your income, then there's no doubt you'll achieve financial independence within 20 years.
No Excuses To Not Saving More
Making at least $30,000 per person should enable you to save at least 10% of your gross income. To save more, find a roommate, live at home, cook your meals, abolish alcohol, skip out on the latest Justin Bieber concert if you have to. Make savings a priority if you want to be free.
If you are making less than $30,000 a year supporting only yourself, then consider: 1)finding a more lucrative job, 2)building multiple income streams, 3)developing more financial buffersand expanding your knowledge and skills. Of course everything is easier said than done. But that's what this site and many other personal finance sites are here for.
The Average Saving Rate Poll
Come take my savings poll to see what the average personal finance enthusiast saves a year. To clarify “savings rate,” a 20% gross income savings rate on $100,000 = $20,000 in the bank for simplicity's sake.
The reality is that you are saving more than 20% if you calculate your after tax income since $100,000 gross is really only around $80,000 net of taxes. Hence, a 20% gross savings rate is equivalent to a ~25% after-tax savings rate ($20,000/$80,000). I've added an after-tax savings poll to be thorough.
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Build More Wealth Through Real Estate
A high saving rate is fundamental for achieving financial freedom. However, your savings must be invested to beat inflation and produce passive income. Inflation is high now, which means we need to invest in real estate, which benefits tremendously from inflation.
In 2016, I starteddiversifying into heartland real estateto take advantage of lower valuations and higher cap rates. I did so by investing $810,000 withreal estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and manages over $3.5 billion for over 500,000 investors. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Both platforms are long-time sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise.
The Average Saving Rate by Income And Wealth Class is a Financial Samurai original post. I've been helping people save and invest more since 2009. Come along for the ride!
