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How much do u pay yourself?

Question: Ok, I am finally out of school and about to start working. I have been promising myself for the past 10 years that when I did begin to make money that I would NOT go insane and that I would try to save a decent amount of money and maintain my current standard of living. I havent many complaints about my current lifestyle, no need for new car, expensive clothes, jewlery ,dinners, etc. How much is reasonable to pay myself? I know that if I skim it off the top and funnel it away I wont miss it because Im not going to suffer any DROP in standards here, so i want to begin this as soon as I am established, before i get into the habit of spending money for no good reason. (my sisters income almost doubled in a year and she seems to be just as broke now as she was last year).

Is there a suggested percentage, formula or whatever? Should i put it in a savings account or maybe savings and then once i build a certain amount start rolling it into other higher yield types of savings? Thanks

Answer: I suggest 10% be saved for life. First, maximize a Roth IRA and any available company 401K or similar plan in diversified stock funds (over time it should pay off better than any other investment approach and looking back, these times are probably the best opportunity to invest for 10-30 years from now). The rest of that 10% should go into an after tax stock fund from which you can draw upon for emergencies (something like the Fidelity 2030 Freedom stock fund is rather conservative approach for someone who just wants a balance of stocks). That 10% should strictly be used for retirement or emergencies and should be saved every year.

Next, you should work to pay off all non deductible debt. It’s unlikely that you can invest and get a conservative return that will exceed typical debt interest. Then stay out of debt – especially all credit card debt.

Finally, you should save whatever you feel comfortable saving towards an eventual down payment on a home (assuming you don’t currently have one and assuming a home fits your life style – they are not for everyone) – perhaps another 10-20%. It’s generally agreed that 25% and perhaps no more than 30% of your income should be going for housing. If you are renting at a lower percentage, bank at least the difference (30% less the rent/utilities) in a stock fund for the long term or perhaps CDs for the short term (1-2 year intended usage – emergencies, purchase of a car, etc.).

Then spend some on yourself. Life is too short just to save everything.

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